2004 A Record Year For Hedge Fund Inflows Despite Fourth Quarter Blip

by Phillip Morton, Investors Offshore.com

21 February 2005

The hedge fund industry gained $16.3 billion in net assets for the fourth quarter of last year according to research compiled by TASS Research, a unit of Tremont Capital Management.

The fourth quarter results represented the lowest quarterly inflow for 2004, although net inflows for the industry in 2004 still managed to total a record $123 billion, up from $72.2 billion in 2003.

“The industry has attracted substantial interest over the last several years as investors sought out returns non-correlated to the broad markets,” noted Robert Schulman, Co-CEO of Tremont Capital Management.

According to Schulman, the decline in inflows in the last half of 2004 was not unexpected, as low volatility in the equity markets kept many investors on the sidelines.

“The fourth quarter marked a cycle of slower, yet good growth in an industry where asset flows have grown at a feverish pace,” he observed.

For 2004, the strategies that attracted the greatest share of net assets were Long/Short Equity, Event Driven and Global Macro, which received $33 billion, $25.7 billion and $16.7 billion in net flows respectively.

For the fourth quarter of 2004, hedge fund flows favoured the Event Driven, Long/Short Equity and Multi-Strategy categories, with these categories receiving net inflows of $6.6 billion, $4.5 billion and $2.9 billion, respectively. These accounted for more than half of the quarterly net asset flow, according to TASS.

Both Convertible Arbitrage and Equity Market Neutral saw net flows decline during the fourth quarter, largely reflecting the low volatility environment that presented fewer opportunities for profitable trading.

Meanwhile, in the Equity Market Neutral category, managers with a fundamental bias tended to perform better than those following technical trading systems.

“The fourth quarter asset inflows continued to favour strategies with broad investment latitude,” commented Stephen Jupp, Senior Vice President and Director of Quantitative Research at Tremont.

“It also favoured the Multi-Strategy category which consists of managers who allocate money to more than one type of strategy. This approach appears to have gained in popularity over the year as investors seek out funds offering more flexibility than a single-strategy focus,” he added.

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