Even as performance flickers at some top managers, investors still are taking a shine to hedge funds. During the first quarter of 2014, investors continued to move increasing amounts of money into hedge funds, sending industry wide assets under management to a record, industry tracker HFR Inc. said. The alternative-asset managers, who can theoretically make money in both rising and falling markets, collected a net $26.32 billion of new cash in the first quarter, the most in almost three years.
The flows pushed hedge-fund assets overall to a peak—$2.7 trillion, nearly double the total from 2008—and marked the seventh consecutive quarter that the industry has hit a record. "Across the spectrum, investors continue to be bullish on hedge funds," said Marlin Naidoo, New York-based head of Americas capital introduction for Deutsche Bank AG. "Even on the back of what was a pretty difficult March, we are definitely seeing people look to increase their hedge-fund allocations." In 2013, hedge funds on average returned about 9% after fees, according to HFR data, with the vast majority of strategy categories making money.
Stock-focused funds returned 14% in 2013. This compares with a 32% gain, including dividends, in the S&P 500 last year. The average hedge fund charged investors a 1.54% management fee and a 18.27% performance fee, according to the latest HFR data. But 2014 has dismayed some managers, particularly over the past few weeks. Some stock-focused funds are down double-digit percentages for the year through the middle of April, thanks in part to wagers on technology and health-care stocks. Hedge-fund stock managers, which include billionaires such as David Einhorn and Leon Cooperman, pulled in the most new money in the first quarter, totaling $16.3 billion, according to HFR. Event-driven hedge funds, which count activist managers such as Daniel Loeb who jostle for corporate changes, drew in the second most, with $4.1 billion.
These funds use strategies that often include betting on the completion of mergers or acquisitions. Stock and event-driven hedge funds managed a total of $761 billion and $722 billion, respectively, at the end of the first quarter. Investors showed less of a craving for hedge-fund managers who place bets on a variety of assets world-wide based on prognostications for economic trends and public-policy decisions. These macro funds actually experienced more than $5 billion of outflows during the quarter, HFR said, reflecting three consecutive years of negative returns for the average macro manager.
For the industry at large, the new asset record was buoyed by the fact that many hedge funds reported positive performance in the first quarter. Hedge funds overall returned 1.1% in the period, HFR said, compared with a 1.8% gain for the S&P 500, including dividends. Funds that focus on bonds and pitch themselves as an alternative to stocks, did better, earning more than 2% in the first quarter. Among the winners in fixed income: $22 billion York Capital Management Global Advisors LLC's Credit Opportunities Fund, which earned about 7% after fees in the first quarter, according to an investor update reviewed by The Wall Street Journal. The document indicates the New York-based fund's largest position is bonds of Lehman Brothers Holdings Inc., which has been a favorite of hedge funds including Paulson & Co. and King Street Capital Management LP, among others.