Hedge funds recorded net inflows of $47 billion as of Dec. 31, down 36% from the previous year, according to data from Hedge Fund Research. It was the first decline in a decade, with net outflows of $824 million in the fourth quarter. Hedge funds of funds were especially hard hit in 2005, with net flow of $9.5 billion, down 71% from 2004. Fourth-quarter net flows to hedge funds of funds declined for the second quarter in a row, with outflows of $2.1 billion. Thanks to positive performance, however, hedge fund industry assets were up 13%, ending 2005 at $1.1 trillion.
Performance of most of the major hedge fund indexes in 2005 easily topped the 4.91% one-year return of the S&P 500 and the 4.56% return of the Russell 2000 indexes. Only two indexes — the MSCI Hedge Invest and the S&P Hedge Fund index — trailed major U.S. equity index returns. All of the hedge fund index returns outstripped the 1.57% return of the Lehman Brothers Aggregate Bond index in 2005, but most trailed the 10.85% one-year return of the MSCI EAFE index.
Hedge fund index returns for the year ended Dec. 31 were: Barclay/GHS Hedge Fund: 10.88%; HFR Composite: 9.35%; Greenwich-Van Global Hedge Fund: 8.4%; MSCI Hedge Fund Composite: 8.2%; Hennessee Hedge Fund: 8.03%; Credit Suisse/Tremont Hedge Fund: 7.61%; MSCI Hedge Invest: 4.7%; and S&P Hedge Fund: 2.28%.