FOUR SCORE – Hedge Fund Assets Quadruple Since 1994

The group estimates that $60 billion of the growth came from new funds, while $100 billion resulted from performance gains.

The report notes that total assets under management in the hedge fund industry are estimated to be $350 billion – $400 billion, with an estimated $50 billion in privately managed accounts within hedge funds and another $100 billion with funds that refuse to report to information services.

“Overall we have seen strong asset flows particularly into the equity-oriented sectors,” noted Nicola Meaden, CEO of TASS Investment Research and Managing Director of Tremont Advisers. “Our data shows a consistently increasing appetite for equity market neutral styles even as overall market volatility has increased.”

Fund Flows

The study also looked at various fund types:

Global Macro – a category which enjoyed its hey day pre-1994, with funds flowing from the category consistently over the past 6 years. A notable exception was a 12-month period beginning in mid-1997 as the strong performance of Soros Fund Management’s Quota Fund and the launch of a series of new funds wrapped around Tiger Investment Management.

Equity Market Neutral – TASS shows that assets have consistently moved into this category throughout the evaluation period, despite rocky performance in late 1998 and much of last year. Investors in this category are seeking equity exposure without directional market exposure. However, the study questions if the category can handle the demand in view of the capacity constraints of the neutral market strategy.

Convertible Arbitrage – the most cyclical of the categories, major fund investment occurred at the end of 1997 and beginning of 1998, at the very top of the market. The subsequent “flight to quality” and liquidity crunch following the Russian crisis squeezed convertible arbitrage managers on both sides.

Event Driven – while this category includes both distressed securities investing and merger (risk) arbitrage, the study suggests that most of the fund flows over the past five years have gone to merger arbitrage. The latter has been pumped up by the increased merger activity in the US and Europe since the introduction of the Euro, particularly since 1998. Distressed securities, on the other hand, have tended to be poor investments.

Long/Short Equity – the roaring bull market has consistently drawn funds into this category in every quarter except the final quarter of 1998, as fund managers liquidated positions to fund redemptions from other portfolio segments. Managers were also cutting back on market exposure at that year-end. Inflows remained strong, with peaks in the last quarter of 1999 and first quarter of this year.

The report analyzed data from 2,200 funds, including 620 “graveyard” funds. Graveyard funds are those that were in existence during the period, but are now closed down.

Data for activity prior to 1994 was deemed too sporadic to provide meaningful results by TASS.