Hedge fund managers are attracting new money and preparing expansion plans, even though their performance has fallen behind roaring equity markets this year, thanks to a shift in how investors view the industry.
Funds brought in $360bn this year in investment returns and inflows from investors, an increase of 15.7 per cent on their assets under management at the end of 2012, according to new figures from the data provider Preqin.
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The continued growth comes as investors lower their expectations of returns from hedge funds and instead view them as a way of increasing diversification and reducing volatility in their portfolio.
Interest has increased as equity market valuations have risen sharply and bond market returns are threatened by future interest rate rises.
As a result, hedge fund managers are positioning themselves for another bullish year in 2014, with one quarter of firms planning to launch additional funds next year, and an overwhelming majority expecting further inflows from wealthy individuals and institutional investors, according to Preqin's survey of fund managers and investors.
"We are seeing a shift in how investors view hedge funds," said Amy Bensted, head of hedge funds at Preqin. "Pre-2008, investors thought of them –and hedge funds marketed themselves – as a source of additional returns.
"Now, they are not seen just being for humungous, 20 per cent-plus returns, but for smaller, stable returns over many years."
The data, which will be published in Preqin's 2014 Global Hedge Fund Report in January, shows hedge funds' assets have risen to almost $2.7tn this year, with growth coming almost exclusively in North America.
The increase includes investor inflows of approximately 5 per cent of the $2.3tn in assets under management at the end of 2012, with a further 10-11 percent from investment returns.
Those returns compare poorly to the returns on offer from equities. The FTSE All-World Index has risen 17 per cent this year, and the US S&P 500 is up 27 per cent. The Barclays Aggregate, however, which measures the global bond market, has returned minus 2 per cent this year.
The forthcoming survey also reveals that the proportion of total industry assets coming from institutional investors is the highest it has ever been, at 66 per cent, up from 63 per cent last year.
While hedge funds were once the preserve of wealthy investors, a wave of money from corporate and public pension funds has forced managers to install an increasingly expensive compliance and reporting infrastructure.
Fund managers are also increasingly offering bespoke investment options for institutional clients, including individually managed accounts and mutual funds.
"Investors feel more secure allocating to hedge funds," said Ms Bensted."You now have more options as an investor, not just off shore co-mingled accounts, you have your pick of how to get access to these funds."
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