But fewer funds were registered in Cayman
In 2013, total hedge fund assets grew by US$228.8 billion, the fastest annual growth on record since 2007. Total assets under management of the hedge fund industry reached a historic high of US$2.01 trillion, according to data and research company Eurekahedge, which covers 28,000 alternative funds globally.
Performance
Hedge funds were up 2.53 percent in the first half of last year, followed by 5.36 percent in the second half. The Eurekahedge Hedge Fund Index returned 8.02 percent for the year but trailed stock market performance such as the MSCI World Index, which was up 21.1 percent in 2013.
Strategies with exposure to equities were the main performance drivers in an environment of suppressed volatility. Market dispersion, the difference in the performance of various assets relative to the average, was also low, which made it harder for managers to identify differentiated investment opportunities.
It is generally believed that hedge fund returns are higher in more volatile markets as they aim to generate risk-adjusted returns that are not correlated to the market.
Distressed debt was the best performing hedge fund investment strategy, gaining 16.8 percent in 2013, with long short equity up 14.3 percent and event driven strategies, which gained 11.3 percent, also delivering strong returns.
Managers focused on Asia Pacific realized the best returns and were up 15.3 percent in 2013 with Japan and Greater China focused hedge funds delivering the best regional results up 25.7 percent and 19.3 percent respectively.
The Mizuho-Eurekahedge Index, an asset-weighted index, finished the year with gains of 6.63 percent indicating that the larger funds slightly underperformed the small and medium sized funds, Eurekahedge said.
Having posted positive returns for most of the year, hedge funds suffered setbacks in June and August last year following market uncertainty over a potential tapering of the U.S. Federal Reserve’s bond buying program.
New capital allocations
Hedge fund managers attracted $146.1 billion of new capital allocations during the year, significantly more than the asset inflows of $109.6 billion in the three previous years combined.
North American fund managers were most successful in attracting new capital with $73.6 billion in asset inflows. European and Asian managers, excluding Japan, saw new net capital allocations of $62.4 billion and $11 billion respectively.
While most fund managers are gearing up for growth, an Ernst & Young survey of large investors in 2013 revealed that 72 percent of investors expect to leave their current allocations to hedge funds unchanged in 2014.
Donald Steinbrugge, managing partner at consulting and third party marketing firm Agecroft Partners, however predicts continued strong positive flows into the industry as institutional investors seek to shift money out of fixed income and into hedge funds.
“This trend will continue as long as pension fund’s forward looking return expectation for a diversified hedge fund portfolio continue to be higher than those expected by their long only fixed income allocation,” he said.
But most assets will continue to flow to the largest managers as new capital is concentrated among a small percentage of managers with the strongest brands, he noted.
Funds of hedge funds have best year
Funds of hedge funds had their best year relative to the hedge fund industry overall on record. A combination of reduced fees, increased diversification and the weeding out of underperforming fund of funds has rendered the multi-manager model more agile, Eurekahedge said.
The Eurekahedge Fund of Funds Index was up 7.79 percent, marginally behind hedge funds as multi-managers posted their best performance since 2009. Fund of hedge funds managers tracked hedge funds more closely than ever with multi-managers outperforming underlying hedge funds in six out of the 12 months this year.
Fewer funds registered in Cayman
Despite the strong inflow of new capital to the industry, fewer funds were registered in Cayman last year. The total number of funds including master funds increased from 10,932 to 11,343 in the first three quarters of 2013.
But the new requirement to register master funds masked a decline in the number of funds, excluding master funds, from 8,950 to 8,756, or 2.2 percent, in the first nine months last year.
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