Hedge funds are poised to close out a strongly profitable year, even though smaller firms are under pressure as investors still have the jitters over an unpredictable market.
Industry veterans refuted rumors that have passed our way regarding a strong flow of redemptions as managers close out their books for 2010.
In fact, the $2.34 trillion dollar hedge fund business saw $26.6 billion of inflows in the third quarter as part of a net increase of $120.9 billion, according to data from Bank of America Merrill Lynch. That equates to a 5.45 increase in total assets under management.
Not bad numbers considering increasing whispers that investors are bailing on hedge funds.
Ken Heinz, president of Hedge Fund Research, said the tales of woe “would be inconsistent with what we observed in the previous few quarters, which has been inflow for several quarters now, with the third quarter being the largest inflow since 2007.”
HFR reported a net $19 billion of new capital in the third quarter, the largest since the fourth quarter of 2007 as the financial crisis was beginning to explode.
Still, the industry is not without worry. Some of the fears about redemptions do come from concerns that the trend is downward, but not towards a massive consolidation.
“We have seen the large get smaller and the small in some cases go out of business,” Anthony Scaramucci, managing partner at Sky Bridge Capital in New York, said in an e-mail response to questions about the industry.
“Assuming 2011 doesn’t present a replay of 2008, we can expect asset flows in (not out) to continue in the positive direction, while redemptions for some managers are coming in looking like they’ll be at all time lows for Q4. That’s a good thing,” he added.
HFR’s Fund Weighted Composite Index saw a 5.17 percent gain in the third quarter.
Funds of hedge funds also are doing well, with a net inflow of $2 billion in the third quarter after a net outflow the previous quarter.
That trend seems to be holding up, again on a mostly anecdotal level so far during the fourth quarter.
“I don’t think our redemption activity is unusual at all—pretty normal. We just won a very significant piece of business and beat out one of the real household names in the business,” said Uri Landesman, who runs Platinum Partners hedge fund in New York, a relatively smaller player in the business with just over $500 million in assets under management. “We find the environment to be reasonably robust and improving.”
Some of the smaller players, though, have been backing up a bit.
Of the total inflows, about three-quarters of it is coming from firms with assets greater than $5 billion, Heinz said.
“That propensity is a reflection of a high level of risk-aversion on the part of investors and is something that has characterized the first three quarters of the year,” he said. “What you're seeing is allocation concentrated in the largest firms in response to a low level of risk tolerance.”
But should things continue apace, the industry, rather than contracting, could be in the midst of a strong resurgence similar to the 2003-early 2007 period.
“Like it was back then, today hedge fund mangaers who did well in the past 24-36 months will be rewarded by investors committing capital in the future,” Scaramucci said.
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