This year is shaping up to be the strongest for institutional investment in hedge funds since 2007.
Institutional investors, especially U.S. public pension plans, have been pouring new money into hedge funds to the tune of $39.9 billion of net inflows and pending searches year-to-date through Nov. 10, according to Pensions & Investments' analysis of reported hedge fund search and hiring activity.
If the current pace holds for the rest of the year — and consultants and hedge fund marketing executives predict it will — 2011 will be the second biggest year for hedge fund activity since 2004 when P&I began tracking searches, hires, new allocations and increased allocations to existing managers.
The year-to-date figure for 2011 represents a 24% increase from the $32.3 billion of net institutional hedge fund activity in calendar 2010, but trails 2007 — which brought in a record net $66.1 billion — by 40%, according to P&I's analysis.
P&I's estimate of net hedge fund activity likely is low. Amounts are not routinely given when searches are made public, and many searches and hires are never announced publicly.
Institutional hedge fund investors have shown remarkable resilience in the face of extreme market volatility that has whipsawed the returns of many hedge fund managers, not only remaining invested in hedge funds, but also continuing to top up their portfolios.
“I've been pleasantly surprised that there have not been knee-jerk reactions from institutional hedge fund investors. They are hanging in there,” said Jeff Gabrione, senior hedge fund researcher n the Chicago office of Mercer Investment Consulting.
The first six months of 2011 produced flat to moderately positive returns for most multistrategy and single-strategy managers with the HFRI Fund Weighted Composite index returning 0.76% year-to-date through June 30. But third-quarter returns were among the worst on record, as the HFRI index returned -5.5% for the three months.
Consistent with the market's wild gyrations since June, the HFRI Fund Weighted Composite index return was 2.43% in October, positive but badly trailing the 10.77% return of the Standard & Poor's 500 stock index.