Evaluating Hedge Fund Performance

CHAPTER 3

Going for the Gold

Growth and Strategies of Hedge Funds

On the heels of the worst equity bear market in 70 years, the rush into hedge funds has continued unabated. Benefiting from a record year of asset inflows after a dismal year by comparison in 2002, when the industry raised only $16 billion, hedge funds received an inflow of $75 billion in 2003, as reported by Hedge Fund Research (HFR).¹ The prior record year was 2001 with $31 billion going into hedge funds. The InvestHedge Billion Dollar Club, which counts funds of hedge funds that have at least $1 billion of assets, grew from 61 members the prior year to 81 members in 2003, while assets managed by the group rose from $91.9 billion to $291.6 billion. Interestingly, underlying the Hedge Fund Research data, the asset gains were concentrated in macro funds, which saw increases of $73.95 billion. However, the gains of $61 billion recorded by arbitrage strategy funds in the convertible, fixed income, and relative value spaces were almost offset by the outflows of $42 billion seen in distressed securities, emerging markets, long/short equity, and sector funds.

SIZE OF THE HEDGE FUND INDUSTRY

The record inflows brought hedge funds' total assets under management to a new record, which Hedge Fund Research estimated at $817.5 billion at the end of 2003.² Though a large amount, it is still dwarfed by the $8 trillion mutual fund industry. Hedge Fund Research estimated that more than 38 percent of the assets went to funds of ...