The 8th Annual Hennessee Hedge Fund Manager Survey indicates that investors placed more money into hedge funds than ever before in 2001, even in the face of modest returns. According to a recent released from Financial Publishing International, survey results show that the hedge fund industry grew 38% ($144bn) in 2001 through manager performance and capital inflows, to a total of $563bn. This demonstrates a massive 80% rise in allocations from the previous record, when 2000 saw $81bn in inflows.
*”2001 was a pivotal year for the hedge fund industry as it was the first time a bear market has been met by a mature hedge fund industry,”* said Charles Gradante, President & CEO of Hennessee Group.* “The record $144bn of inflows indicates investors are accepting hedge funds as a realistic alternative investment for the purpose of diversifying portfolios, capital appreciation, and managing downside risk.”*
Hennessee is a global hedge fund consultancy, advising individuals and institutions on over $1bn in hedge fund assets. Its annual Hedge Fund Manager Survey is the oldest, largest, and most comprehensive hedge fund industry survey. The 2002 survey included 766 hedge funds and with over $141bn in assets, equal to 25% of the assets in the entire industry. The median hedge fund size in this year’s survey was approximately $94 million. Other findings in the survey included:
-Hedge funds outperformed the broader equity markets in 2001, as the Hennessee Hedge Fund Index advanced +3.98% net of fees, bringing the annualised return since January 1987 to 18%, versus the S&P return of 13.6% over the same time period.
-Hedge funds were able to avoid losses by holding high levels of cash and maintaining low market exposure. In 2001, the average hedge fund net market exposure was +49%.
-After spiking up in 1994 and 1998, the use of margin in 2001 declined to its lowest level since the survey began in 1994. In fact, hedge funds used minimal margin in 2001, as the average long exposure decreased 8% to 83%.
-Individuals remained the largest source of capital for hedge funds, contributing 48% ($270bn) of total assets, but continued to decline from 80% ($79bn) of total assets in 1994. Fund-of-funds were the second largest source of capital, contributing 20% of assets.
·-37% of hedge fund managers indicated that high net worth individuals and family offices were the fastest growing source of capital, while 25% specified corporations, 10% pension funds, 9% for both endowments/foundations and fund-of-funds, and 11% other sources of capital.
-Due to the increased number of banks and insurance companies offering hedge fund products, 54% of hedge fund managers were Registered Investment Advisers in 2001, up from 47% in 2000.
There does appear to be some concern relevant to the ability of the industry to absorb the incoming money flow without diluting the talent pool and thus hurting performance. However, E. Lee Hennessee, Chairman of the Hennessee Group, notes, *”Most managers seem to have a good sense of their capacity limits.”*
Looking forward, Hennessee is not expecting the industry growth to fall off any time soon. President Gradante said, *”It will only start to slow down when we get into a bull market again.”*