Hedge Fund Flows Up 6% in 2006

February 28, 2007 (PLANSPONSOR.com) - Hennessee Group LLC, an adviser to hedge fund investors, estimates that hedge fund industry assets increased by $215 billion (17.5%) in 2006 to $1.442 trillion.

Preliminary results indicate that the hedge fund industry experienced net inflows of $75 billion (+6.1%) in 2006, with the remaining $140 billion   the result of positive performance, as evidenced by the Hennessee Hedge Fund Index, which advanced +11.4% in 2006.  

The growth rate of net inflows at +6% is a modest increase from +4% in 2005, but is still significantly less than the +19% increase in 2004 and its peak of +34% in 2001, according to the firm.

The majority of assets flowed to multi-strategy arbitrage funds as total assets for arbitrage and event driven funds were up approximately 31.5% in 2006.    The Hennessee Arbitrage/Event Driven Index advanced 12.3% for the year, as most arbitrage strategies posted double-digit returns, according to a press release.   Asset growth in arbitrage and event driven funds is expected to continue as pension funds and institutions further increase their allocations to hedge funds, according to the firm.

Performance Boost

Long/short equity assets increased approximately 10.5% in 2006, with the increase coming entirely from performance, as the Hennessee Long/Short Equity Index advanced 11.1% in 2006.   New inflows to long/short equity funds were offset by investor withdrawals, fund liquidations, and the return of capital to investors. Furthermore, many large established long/short equity funds are no longer accepting new capital, and in several cases, even returning capital to investors in order to remain at a manageable asset size, according to the firm.   Hennessee estimates that over 30% of hedge funds managing in excess of $1 billion are currently closed to new capital.

Despite growing interest on the part of pension funds and institutional investors, direct investments by individuals and family offices remain the largest source of capital for the hedge fund industry.  

Going into 2007, Hennessee Group estimates they represent approximately 40% of total industry capital followed by:

  • fund of funds (23%),
  • corporations (18%),
  • pension plans (11%), and
  • endowments and foundations (8%).