Hedge funds on the rebound

The hedge fund industry recorded one of its best years in 2009, after suffering record average losses of 19 per cent in 2008.

According to data provider Hedge Fund Research hedge funds stand to gain approximately 19 per cent in 2009. Official confirmation of this will be released on 8 January.

As a result the industry has yet to regain some of the ground lost in the previous year, but put in the best performance since 2003, following investment gains and new investment inflows.

The annual performance of 18 to 20 per cent augurs well for positive assets inflow in 2010, commented Canover Watson, managing director of Cayman fund administrator Admiral Administration.

After four consecutive quarters of net withdrawals, hedge funds showed a net asset inflow in the third quarter of 2009, increasing hedge fund industry assets to US$1.53 billion, HFR said.

At the same time new hedge fund launches exceeded the number of liquidations in the third quarter of 2009 for the first time since mid-2008.

More than 2,100 funds were liquidated since the end of 2007.

The total number of new funds will remain well below the levels seen between 2002 and 2007, but is expected to exceed the 2008 total, the data provider said in December.

However, the losses and record redemptions of 2008 have changed the dynamics between investors and fund managers within the industry.

Investor pressure forced many fund managers to either cut or restructure their fees.

Goldman Sachs Asset Management lowered the base fee for its flagship Global Tactical Asset Allocation fund in November 2007 and announced in a stock exchange filing just before Christmas 2009 that it was not going to increase the fee to earlier levels in 2010.

A sudden return to the typical fee structures of

2 per cent of assets and 20 percent of profits is unlikely.

In 2009 a study by research firm Preqin found that the average base fee demanded by hedge funds was between 1.5 per cent and 1.7 per cent, well below the historically charged 2 per cent.

Performance fees of generally 20 per cent of returns have also come under pressure through so-called high water mark clauses.

These terms require that fund managers have to recover previous losses before they can fully collect incentive fees.

Although both the equity and the bond markets rebounded, not all investment strategies performed alike.

Convertible arbitrage funds, that exploit pricing discrepancies between corporate convertible debt and equity, recorded the highest gains, according to data from both Barclay Hedge and HFR.

The strategy returned 50 and 56 per cent respectively compared to 12 and 22 per cent for average long/short equity funds.

The best performers of 2008, short-biased equity funds, which profit from falling share prices, were the only funds losing money on average in 2009.