'Disappointed' investors still love hedge funds

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Even as the typical fund drastically underperformed the broader market, the hedge-fund business saw its biggest spike in capital inflows since 2007, a new study conducted by the hedge-fund data tracker HFR showed.

During 2014, according to the report released Tuesday, hedge funds received a total of $76.4 billion in new money, bringing total industry assets under management to a record $2.85 trillion. The inflows occurred even as returns in the HFR composite index slumped to 3.3 percent, a level far lower than the returns an investor would have received for simply tracking the S&P 500 stock index, which was up 11.4 percent. It was also the worst performance for the HFR composite since 2011, when it sustained losses of 5.3 percent.

To be sure, some hedge-fund strategies saw outflows of capital, notably, macro, or globally focused, funds, which experienced overall redemptions of $28 billion over the course of the year, according to HFR. Activist funds, on the other hand, experienced gains.

But the general influx of capital to the hedge-fund space—and as HFR's estimate of the absolute number of hedge funds and fund of funds combined reached an all-time high of 10,102, higher than that of the prior record in 2006—suggests that investors haven't yet been turned off by lackluster performance figures.

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"I think investors are disappointed with the performance for 2014," said Don Steinbrugge, managing partner of the hedge-fund marketing consultant Agecroft Partners, in a telephone interview. "However, I think most hedge-fund investors are still confident that they're going to get strong risk adjusted returns by allocating to hedge funds, and I think in 2015 we are going to see an all-time high as far as hedge-fund assets go."

This, Steinbrugge noted, is because in the current environment, where many bond investments remain unattractive, for instance, in such a low interest-rate environment, and emerging markets have been battered, there are limited places to invest money as an alternative to the stock market.

And the stock market has been on quite a tear, making it tough to beat for the many hedge funds that invest in small- or mid-cap companies, Steinbrugge added. The Russell 2000 small-cap index, in fact, was up 3.5 percent in 2014, about the same amount as the HFR composite.