Alternative Investment Industry Enjoys AuM Surge; Hedge Funds Hit Record Size

Tom Burroughes

22 January 2014

Assets in the private equity and hedge fund industries stood at a combined $6.13 trillion last year, with the hedge fund industry reaching a fresh record high of $2.63 trillion to cap what was a strong year in a sector that had previously suffered in the 2008 financial crisis.

Data from Hedge Fund Research and Preqin, organisations tracking developments in these “alternative” investment markets, both point to rising investor enthusiasm for assets that have at times been out of fashion as well as faced rising regulatory challenges.

Chicago-headquartered HFR said total capital in the industry rose by $120 billion in the final three months of 2013, on $10.5 billion of net inflows. Investors were particularly keen on event-driven strategies , as well as special situations and distressed/restructuring plays.

For the whole of 2013, hedge fund capital rose by $376 billion on $63.7 billion of net inflows. The HFRI Fund Weighted Composite Index posted a gain of 9.2 per cent last year, the best calendar year performance since 2010, the report said. Even so, the equity market, as measured for example by the S&P 500 Index of US stocks, sharply outperformed hedge funds, rising by 32.36 per cent, although bonds had a miserable year, with the Barclays Government/Credit Aggregate Bond index falling by 2.47 per cent. The hedge fund index had a standard deviation of 3.68 per cent. Over three years, annualised, the HFRI Fund Weighted Composite Index achieved a net return of 3.25 per cent, lagging the S&P 500, at 16.16 per cent. Over 10 years, however, the hedge fund performance is 10.94 per cent, ahead of 9.44 per cent for equities.

On the downside, while hedge fund categories such as event driven strategies gained ground and posted stronger performance, macro strategies, such as those making directional bets on interest rates, currencies, equities and bonds, languished, the HFR data showed. Macro funds logged an outflow of $13.3 billion in the fourth quarter of last year; the HFRI Macro Index fell by 0.2 per cent in the year.

“Hedge fund industry growth has continued to a record level of assets despite the challenges presented by a transitional regulatory environment, strong gains in traditional equities, and uncertain macroeconomic and political environments in 2013,” Kenneth Heinz, president of HFR, said.

Later, in a presentation to journalists in London, Heinz said tighter regulations on banks’ proprietary dealing desks will encourage teams to defect and create new hedge fund businesses, a factor likely to encourage new startups this year. However, given rising barriers to entry in the sector, Heinz said he expected more start-ups to harness platforms to cater to their back-office needs.

Private equity
In the private equity sector, Preqin, meanwhile, said in its 2014 Global Alternatives Report that total private equity assets under management stood at $3.5 trillion as of June 2013 , up from $3.2 trillion as of June 2012.

The report said that last year saw the largest amount of capital raised since the global financial crisis, with private equity funds raising $454 billion, but only 7 per cent of this capital was raised from first-time fund managers, the lowest proportion ever recorded.

Some 71 per cent of investors in private equity intend to commit to their next private equity fund within the next year, the report said.

In real estate, meanwhile, confidence has returned; industry assets stood at $657 billion as of June 2013, up from $576 billion a year earlier. In the case of infrastructure, industry assets are at a record high of $244 billion ; up from $210 billion a year before.

“The alternative assets industry is now valued at over $6 trillion, according to Preqin’s latest estimates, and all signs indicate this figure will continue to grow. In speaking with investors, we have found that many institutions not only have significant allocations to the private equity, hedge fund and real assets sectors, but many are looking to invest even more capital in these asset classes in the near future,” Mark O’Hare, CEO at Preqin, said.