Hedge Funds Hit New High

Assets held in hedge funds surged to a record $2.13 trillion in the first quarter of 2012, according to a new report from Hedge Fund Research, Inc., a global company specializing in the indexation and analysis of hedge funds.  As hedge fund assets rose, investors showed an even greater preference for two hedge fund strategies known as “relative value” and “macro” strategies.

The previous record for hedge fund assets under management - $2.04 trillion set in mid-2011 – was surpassed as investors allocated more than $16 billion to hedge funds in the first quarter of 2012, reports Hedge Fund. At the same time, hedge funds posted their best first quarter performance in five years.

Over the past two years, investors have favored relative value and macro hedge fund strategies, Hedge Fund reports, and this preference “accelerated” in the first quarter of this year. The two strategies received the “overwhelming majority” of new investor capital for the quarter, according to Hedge Fund, which reports than investors allocated $12.4 billion in new net capital to relative value strategies and $7.8 billion to macro strategies in the first quarter. Over the same period, investors redeemed $2.9 billion from “equity” and $940 million from “event driven” strategies.  Despite the recent fund flows, macro funds remain the smallest category, while relative value strategies recently surpassed event-driven strategies to become the second largest hedge fund category.

A relative value hedge fund strategy “seeks to take advantage of price differentials between related financial products, such as stocks and bonds,” according to investor information provided by the alternative investment consulting company Barclay Hedge.  The strategy focuses on products with prices that do not reflect their true value, and involves short selling securities that are overpriced and buying underpriced securities. “Once prices revert to true value, the trades can be liquidated at a profit,” said Barclay.

A macro hedge fund strategy focuses on investing in financial products with prices that fluctuate with changes in economic policies and the flow of capital around the world. Generally, global macro strategies focus on currencies, interest rates and stock indexes, said Barclay Hedge.

In addition to relative value and macro strategies, investors continue to show a marked preference for the industry’s most established managers, said Hedge Fund, which notes that investors allocated $18.3 billion in new capital to firms with more than $5 billion of assets under management. Firms managing less than $5 billion experienced a combined net outflow of nearly $2 billion for the quarter.  Investors also continued to reduce exposure to funds of hedge funds.

“Investors responded favorably to the risk shifting which occurred across financial markets in the first quarter, continuing the trend of allocating to arbitrage (relative value) and macro strategies, which exhibit lower directional beta to equity markets,” said Kenneth J. Heinz, Hedge Fund president. “The record level of assets and the shifting of distribution of these assets are indicative of powerful trends shaping the hedge fund industry in 2012.”

Half of investors with a net worth exceeding $25 million own hedge funds, according to Millionaire Corner research, while about 8 percent high net worth investors – those with $5 million to $25 million in investable assets – own hedge funds.