In what could be a harbinger of increased market volumes, hedge fund launches last quarter reached their highest levels since 2007, before the economic crisis sent both hedge fund managers and stock traders running for cover.
According to data from industry tracker Hedge Fund Research, 298 hedge funds launched in the first quarter of 2011. Almost half of those, 144, were straight equity hedge funds. Of the others, 68 were fund of funds, 48 were macro funds, 30 were relative value funds and eight were event-driven funds, all of which tend to trade at least some equities.
Kenneth Heinz, president of HFR, said the recent growth in the hedge fund industry is a result of powerful trends attracting investors to multiple strategies.
“As the industry continues to appeal to a wider constituency of global investors, more funds are launching to suit specialized investor requirements, preferences, risk tolerance and performance expectations,” Heinz said.
According the HFR, total hedge fund assets now exceed $2 trillion.
The data comes on the heals of a report from TrimTabs Investment Research and BarclayHedge that showed billions of dollars flowing into hedge funds in recent months, including $15.7 billion in March alone.
Joel Schwab, chief operating officer for Channel Capital Group, said that while a number of hedge funds did not succeed in navigating the recession, large hedge funds today are doing as well as ever in regard to capital raising, particularly from the pension industry.
“Almost every day carries an additional news story of a major pension fund that’s increasing allocations to hedge funds,” Schwab said. “Pensions have a need for substantial returns to avoid problems, and generally the returns they are targeting are perceived as possible with hedge fund investing.”
Channel Capital Group both does fund raising for hedge funds and owns the industry tracking site HedgeFund.net. According to the site, total hedge fund assets rose by 3.11 percent in the first quarter.
Currently, there is an amassing of assets among the largest hedge fund firms, Schwab said. That is because pension plans are driving capital flow, and most pensions will only invest in funds that exceed a billion dollars in assets. However, the recent launch of so many new funds could be an indicator of strength across the industry.
“The recent rate of emerging hedge funds coming to market is a healthy sign,” Schwab said. “But the success of these funds will depend on their ability to launch with institutional-type infrastructure and enough capital to see the business through.”
The vast majority of hedge funds trade equities, and they tend to be more active traders than mutual funds or other managers, Schwab said. The increasing growth in hedge fund assets should lead to higher equity volumes down the road, he added.
Keith Gertsen, head of Citi’s unified hedge fund sales effort in North America, said the growth in hedge funds is a part of a larger trend away from passive index-style investing and back to traditional stock picking.
“People that are creating portfolios through ETFs and index-like performance are moving to single-stock investment decisions,” Gertsen said. “Generally, when that happens, you can see a change in the equity volume.”
While the market is still heavily concentrated on ETFs and other investments based on indexes, the hedge fund industry has been growing because its absolute-return model has proven to be effective, Gertsen said.
Unfortunately, there’s a lot of uncertainty hanging over the markets in regard to both the debt crisis in Greece and the debate over raising the U.S. debt limit. Channel Capital Group’s Schwab said he wouldn’t be surprised if hedge funds took conservative positions right now as they try to figure out how these events will proceed.
“There’s a huge trend of pension investing that is driving rapid growth in hedge fund assets globally, and that growth will likely carry over into increased equity volumes,” Schwab said. “But in the near-term, with these two major macro events on everyone’s radar screen, it’s unclear whether that volume can grow until these matters are settled.”
