2002 A Dud Year For Hedge Funds, Says Tremont

by Carla Johnson, Investors Offshore, London

03 January 2003

Based on their superior returns, study after study in 2002 outlined a glittering future for hedge funds, culminating in December with a report by investment bank Putnam Lovell NBF and consultants New River Inc which said that institutional investors and wealthy individuals will channel $800 billion of new money into hedge funds by 2010, and that industry assets will rise to $2 trillion.

The reality in 2002 was more prosaic, with most hedge funds struggling to break even - a bad performance given that managers' rewards are tied to profit shares.

Research house Tremont reported its CSFB/Tremont Hedge Fund Index up 1.09% for November 2002, accounting for most of the Index's year-to-date gain of 1.96%. The Putnam Lovell report assumed that returns would be flat in 2002, but would average 9% a year thereafter.

Tremont says that a fifth of the 1,797 hedge funds it was tracking at the start of 2002 had stopped reporting their results by the end of October, and that most of those funds shut down. The majority of closures were of small funds, but the collapses of Lipper & Co. and Beacon Hill helped to make 2002 the worst year for hedge funds for more than 10 years.

Even so, the sector has continued to grow: Tremont estimates that a net $6.8 billion was added to hedge fund assets during the third quarter of 2002, bringing total net inflows last year to just under $17 billion. In 2001 the total topped $31 billion.

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