Hennessee Group LLC estimates that hedge fund industry assets increased by $462 billion in 2007 to $1.997 trillion, representing 30% growth over industry assets since the beginning of 2007.
Preliminary results indicate that the hedge fund industry experienced net inflows of $278 billion in 2007. The remaining $184 billion was the result of positive performance, as evidenced by the Hennessee Hedge Fund Index, which advanced +11.6% in 2007.
These figures do not include assets invested in fund of hedge funds.
The amount of inflows represents the largest amount of annual inflows into the industry in its history and a 75% increase over the amount of inflows in 2006 of $159 million. The percentage increase in assets due to inflows represents the highest level of inflows since 2001.
“2007 was clearly a milestone year for hedge funds. With the exception of two high profile failures in the mortgage and credit space, performance for the industry was excellent, causing institutional investors to further increase their interest in the asset class,” says E. Lee Hennessee, managing principal, Hennessee Group.
“Whereas it was relatively easy for new funds to raise capital several years ago, we are seeing higher barriers to entry within the industry today. Institutional investors increasingly prefer more established players,” adds Charles Gradante, managing principal, Hennessee Group.
Total assets for arbitrage and event driven funds were up approximately +35% in 2007. The Hennessee Arbitrage/Event Driven Index advanced +7.8% for the year, as arbitrage strategies were affected by the volatility in the credit markets. The majority of assets flowed to large, multi-strategy funds, as they have been the preferred choice among pensions as they make direct investments in hedge funds.
Total assets for long/short equity funds increased approximately +26% in 2007. The Hennessee Long/Short Equity Index advanced +12.1% in 2007. After experiencing slight outflows from the strategy in 2006, investors became more interested in the strategy in 2007, as returns improved relative to equity indices due to a better environment for short selling.
As for 2008, Hennessee Group estimates that individuals/family offices and fund of hedge funds represent the largest sources of capital for hedge funds, each comprising 31% of total industry capital. Pensions represent another 14% of industry capital, while endowments/foundations represent 12% and corporations represent 12%.