After two tumultuous years, 2010 has been a year in which hedge fund managers concentrated on their funds and their businesses.
Although many hedge fund managers have been forced to cope with turbulent global macroeconomic forces well outside their control in 2010, particularly Europe's worsening sovereign debt problems, the hedge fund industry was not buried by bad news, unlike 2008 and 2009.
“After 2008 and 2009, no news is good news,” said Stephen L. Nesbitt, CEO of specialist alternative investment consultant Cliffwater LLC, Marina del Rey, Calif. “2008 was the year of the disaster, 2009 was the year of recovery and 2010 is the year that managers delivered on their promises,” he said.
Despite uncertainty over the recently disclosed insider trading investigation, 2010 was most notable for its lack of scandal, spectacular hedge fund blowups or horrendous performance.
Instead, new hedge fund launches are on the rise, merger-and-acquisition activity in the hedge fund arena is picking up and institutional investors show little sign of slowing their investment pace.
In fact, in Bank of America Merrill Lynch's most recent institutional investor survey, 55% of respondents said they intend to increase their direct investments in hedge funds over the next one to two years.
Hedge fund managers spent the past year sorting out and shoring up their businesses, said Ron Suber, senior partner and head of global sales and marketing for hedge fund trading and technology provider Merlin Securities LLC, New York.
“In 2010, hedge fund managers surpassed their high-water marks, due to positive performance. They reduced their fixed expenses and attracted new inflows into new strategies, especially into managed accounts,” Mr. Suber said.
Net inflows improved for both hedge funds and funds of funds during the past year. A net $42.3 billion flowed into hedge funds in the first three quarters of 2010, bringing total industry assets to $1.8 trillion as of Sept. 30, up from $1.6 trillion at the end of 2009, according to data from Hedge Fund Research Inc., Chicago.
The positive flows in the first nine months of this year are in marked contrast to 2009, which saw a net outflow for the year of $131 billion, and 2008 with a total net outflow of $154 billion, HFR's research shows.
Hedge funds of funds experienced net inflows in the third quarter of $256 million, compared with net outflows of $13.9 billion in the first half of 2010, $118 billion in all of 2009 and $41 billion in 2008.
“Bottom line, 2010 has been a good year in the sense that hedge fund returns met expectations — in the high single digits — and kept their risk relatively low despite month-to-month volatility. May was the litmus test and hedge funds held up well,” Cliffwater's Mr. Nesbitt said.
Year-to-date Nov. 30, the HFRI Fund Weighted Composite index returned 7.12%, compared with the 7.88% return of the Standard & Poor's 500 stock index and the 8.6% return of the Barclays Capital Government/Credit Bond index, said Kenneth J. Heinz, HFR president, in an interview.