Last year was not kind to hedge funds, especially hedge funds of funds, which saw a huge plunge in net inflows compared with the prior year.
Data from Hedge Fund Research Inc., Chicago, showed that net inflows to hedge funds decreased 36% to $47 billion for the year ended Dec. 31, compared with $74 billion in 2004. Net inflows in the fourth quarter declined for the first time in a decade, with net outflows of $824 million.
Hedge funds of funds were smacked hard, with net flows dropping 71% to $9.5 billion in 2005 compared with $33 billion in 2004, HFR reported. Net flows to hedge funds of funds declined for the second quarter in a row in the fourth quarter, with outflows of $2.1 billion.
Assets managed in hedge funds industrywide actually rose 13% in 2005 to $1.105 trillion, but much of the increase was because of market returns. The HFR Composite index, for example, returned 9.35% in 2005; while the Barclay/
GHS Hedge Fund index, 10.71%; the Greenwich-Van Global Hedge Fund index, 8.4%; and the MSCI Hedge Fund Composite, 8.2%. Those easily outperformed the 4.91% one-year return of the S&P 500 index, the Russell 2000's 4.55% and the 2.43% return of the Lehman Brothers Aggregate Bond index.
Returns of funds of funds trailed single-strategy and multistrategy funds, on average, but still were well into positive range, with the HFR Fund of Funds Composite index up 7.33% for the year ended Dec.31.
Institutional investment in hedge funds also slowed significantly in 2005.
Overall, institutional investors from around the world invested or committed at least $20.2 billion in new investments to hedge funds and funds of funds in 2005, down 16% from the record-breaking level of $23.8 billion in 2004, according to analysis by Pensions & Investments of reported searches and hires.
These estimates of collective institutional inflows are conservative, given that the size of the hedge fund mandate isn't available for many reported searches and hires. And an additional $6.3 billion of new investment and market growth from existing hedge fund investments was reported by defined benefit plans among the top 200 pension funds in P&I's annual survey (P&I, Jan. 23).