Hedge Funds Hold Record Assets Despite Underperformance

January 18, 2007 (PLANSPONSOR.com) - Hedge fund assets reached a record $1.43 trillion in 2006 despite underperforming equity indexes, according to new data from Hedge Fund Research (HFR).

Reuters reports HFR data showed global inflows into hedge funds was a record $126.5 billion in 2006, well above the $46.9 billion reported for 2005. The group said the number of hedge funds is now estimated at 10,500 worldwide, fueled by demand from institutional investors, pension funds and wealthy families.

However, hedge funds in aggregate failed to outperform the Standard & Poor’s 500 index for 2006, HFR said, according to Reuters. The HFRI Fund Weighted Composite Index returned 12.85% for 2006, compared to a 15.8% total return for the S&P 500 Index.

Some hedge fund strategies fared well in 2006, such as the HFRI Emerging Markets Index which returned 24.3% and event-driven and merger arbitrage strategies – which bet on prospects for corporate changes like mergers and restructurings – which gained 15.7% for the year. Also, funds of hedge funds saw inflows of $49.7 billion in 2006, compared with $9.5 billion in 2005.

A report from Bloomberg said fund funds of funds returned 10.4% in 2006, compared with 7.5% in 2005, according to HFR.

Hedge-fund inflows plunged 64% in the fourth quarter due in part to investors’ reaction to the collapse of Amaranth Advisors LLC. Fund managers attracted $15.8 billion in the final three months of the year, compared with $44.5 billion in the third quarter, HFR said, according to Bloomberg.

Amaranth collapsed in September 2006 after reporting a loss of 35% due to bad wagers on natural gas prices (See SD County Pension Nearly Doubles Loss Estimate from Amaranth Collapse ). Some investors shifted strategies after the collapse, HFR said.