The Changing World of Hedge Funds

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Yesterday the Alternative Investment Management Association, or AIMA, reported that Institutions are now the largest investors in hedge funds, surpassing high net worth individuals who have traditionally contributed the largest portion in the past.The change seemingly comes from two different factors, the first being that “pensions, endowments, foundations and government authorities” have been steadily increasing their exposure to hedge funds in the hope of bolstering their returns while at the same time huge losses from the hedge funds in 2008 led to individual investors pulling cash out at a fast pace.  The change would seem to make sense as institutions generally invest more for the long-term.Hedge Fund Research,  a provider focusing on analysis of alternative investment information, estimated that $152 billion were taken out of hedge funds in the fourth quarter of 2008 bringing the total assets to $1.4 trillion by the end of the year.  Institutions are now thought to make up more than half of this sum, whereas previously they were thought to have invested only one-third of the total amount invested in hedge funds.

Anecdotal evidence of this change comes in the form of the Universities Superannuation Scheme, Britain’s 23 Billion pound pension fund, which is said to be doubling its allocation to hedge funds and private equity to 20 percent.

Of Course Hedge Fund Research isn’t the only one estimating the size of the hedge fund industry.  Trim Tabs investment research has put out its own numbers recently which suggest that hedge fund assets fell to $964 billion at the end of January this year.  This number is down from nearly $2 trillion at the mid-point of last year.  UBS has also recently put out some figures which play off of Hedge Fund Research’s initial estimates.  UBS believes that hedge fund assets will likely fall by about $192 billion in the first quarter of 2009, bringing assets to around $1.215 trillion.

The bigger story behind all these estimates however may be the fact that redemptions do not seem to be slowing.  Funds argue that these redemptions, estimated to be the second highest on record last month, could cause further disruption in the equity market by forcing the funds to liquidate massive holdings.  To combat this, some funds have installed “gates” around funds which don’t allow investors to withdraw their funds but this does not seem a long term solution.  Indeed, some funds have resolutely stuck to a “no-gate” policy while others, such as Citadel, have earlier this month stated that they will begin to put an end to the gates they have installed.  The raising of “gates” is indeed a good sign, however until redemptions slow noticeably, something which does not seem to be on the immediate horizon, the economy is definitely not out of the woods.

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