Hedge Funds Assets Set To Hit $3 Trillion This Year

February 22, 2014

Despite uninspiring performance in recent years in which hedge funds significantly underperformed the widely followed S&P 500 index, a new survey by Deutsche Bank finds that the industry is likely to attract strong inflows in 2014. The annual survey covered over 400 investor firms representing $1.8 trillion in hedge fund assets between them, which equates to about two thirds of the entire $2.6 trillion industry. Contrary to expectations, the survey found that 80 percent of the respondents were satisfied with their hedge fund investments in 2013 and felt that hedge funds performed as expected or better last year.

For the record, hedge funds across all categories returned an average of 9.3 percent last year, while funds investing in stocks reported an average gain of 15 percent according to research firm Hedge Fund Research. The S&P 500 gained 32 percent last year.

Institutional Investors Increase HF Allocation

The Deutsche Bank survey found that the hedge fund industry is likely to reach $3 trillion in assets for the first time by the end of 2014. Hedge funds had roughly $2.6 trillion under management at the end of last year. The growth is expected from increased net inflows and an anticipated performance related gains of 7.3 percent for 2014.

Results from the survey showed that there is a steady increase in hedge fund allocation among institutional investors. This year 57 percent of institutional investors are planning to increase allocations to hedge funds, which is an improvement over 2013 when nearly 50 percent of institutional investors added to their hedge fund investments. Institutional investors now account for two thirds of the overall hedge fund assets, a significant increase compared to the pre-crisis period when only about one third of hedge fund assets were from institutional investors.

The steady growth in institutional investor allocation to hedge funds in the last few years is a clear indication of a change in perception of hedge funds with many investor firms increasingly viewing hedge funds as just one part of their portfolio. In the past, mainstream institutional investors saw hedge funds as a separate asset class with alternative investment strategies and shied away from them.

Some Prominent Hedge Funds Shut Down

While the overall investor sentiment towards hedge funds is showing signs of marked improvement, some well-known funds are pulling their curtains down for varying reasons. Wall Street Journal is reporting that the New York based hedge fund Exis Capital run by Adam Sender, an early employee of SAC Capital Advisors is shutting down after 16 years of operation. The firm which once managed in excess of $1 billion had just $75 million under management at the end of last year and reported a loss of 5.1 percent for 2013. Sender who is also an avid art collector had said in the past that a 2006 lawsuit against the firm by the Canadian insurer Fairfax Financial Holdings had hurt the firm’s ability to raise money.

Other funds that are closing are the two multi-billion dollar stock focused hedge funds Joho Capital LLC and Scout Capital Management LLC.  Joho Capital managed $5 billion in assets at the end of 2013. Its fund manager Robert Karr attributed the closure decision to the difficulty in generating solid returns post the financial crisis, and his interest in spending more time with his family. The fund generated annualized returns of 20 percent since its inception in 1996. Scout Capital’s decision to close is due to diverging interests of its two co-founders as one of them, Adam Weiss wanted to step away from managing outside capital. Scout founders stared the firm in 1993 with $3 million. The firm reached its peak assets of $6.7 billion under management last year helped by a 21 percent gain for its largest fund.

Impact On Job Market

The expectation of an expanding hedge fund asset size and the growing openness among institutional investors to hedge funds are positive signs for the industry. It is however not clear whether the increased allocation to hedge funds is benefiting funds of all sizes. The expanding size of the industry will likely have an incremental positive effect on the employment prospects though the admission by even more established fund managers of the difficulty in generating targeted returns in today’s environment suggests that the hedge funds playing field today is very different from that before the 2008 crisis.

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