HEDGE FUNDS END 2010 WITH RECORD QUARTERLY ASSET INCREASE

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Investors favor Macro, Arbitrage funds as industry nears pre-crisis asset level; Increasing risk tolerance and falling volatility influence investor allocations

The hedge fund industry concluded 2010 with the largest quarterly increase in assets in its history, according to data released today by Hedge Fund Research (HFR), the leading provider of hedge fund industry data. Total industry assets grew to $1.917 trillion, reflecting a quarterly increase of nearly $149 billion, topping the previous record increase of $140 billion in 2Q07. The year-end figure approaches the historical asset peak of $1.93 trillion set in 2Q08 and represents an asset increase of 44 percent since 1Q09. Hedge funds as represented by the broad-based HFRI Fund Weighted Composite Index posted a gain of 10.5 percent, but full-year gains were concentrated into year end, with the HFRI gaining over 5.5 percent in 4Q10.

Investors continued to increase allocations to the hedge fund industry, committing $13.1 Billion net new capital to hedge funds in 4Q. This figure follows $19 billion of new capital from the prior quarter and brings full-year 2010 net inflows to $55.5 billion, the highest annual total since 2007. In contrast to prior years, falling volatility contributed to a more narrow performance dispersion among hedge fund strategies, with Relative Value Arbitrage gaining +11.7 percent, while Macro strategies posted a gain of +8.6 percent, bounding gains of +11.5 and +10.6 percent for Event- Driven and Equity Hedge strategies, respectively.

Investors exhibited a clear preference for Macro strategies in 4Q, allocating $6.6 Billion of new capital to Macro funds, while Equity Hedge experienced a small net redemption of $620 Million. For the full year, $21.5 billion in new inflows went to Relative Value strategies, with Macro and Event Driven adding $17.3 billion and $14.0 billion. Equity Hedge, the largest strategy area by assets, experienced an increase of $2.6 billion for 2010. Investors allocated $1.8 billion to Funds of Hedge Funds (FOFs) in 4Q10, the second consecutive quarter of inflows for FOFs.

Increasing investor risk tolerance also contributed to a moderation in the concentration of quarterly allocations to the industry’s largest firms. While more than 80 percent of net new assets were allocated to firms with more than $5 billion in AUM for the entire year, only 51.6 percent of inflows went to the industry’s largest firms in 4Q.