Hedge fund assets approach all-time high

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Assets managed by the global hedge fund industry are just 2 per cent shy of their previous all-time high, set in October 2007, data released on Tuesday show.

Strong performance and the beginnings of investor inflows back into funds have seen the industry quickly bounce back from the lows hit in early 2009, when clients rushed to pull capital from hedge funds as part of a flight to more liquid investments.

The average hedge fund has returned 2.56 per cent so far this year, according to Chicago-based data provider Hedge Fund Research, compounding gains of 24.55 per cent in 2009, which was the industry’s best year in a decade.

Hedge funds collectively manage about $1,670bn of assets, according to HFR.

Relative-value funds – which specialise in the trading strategy made infamous by the collapse of Long-Term Capital Management – have been among the best performers.

The average relative-value fund has returned 3.58 per cent so far this year – beating the industry average by a wide margin. Relative-value strategies also outperformed in 2009, returning 25.8 per cent – more than double the average annualised return expected by the strategy.

Relative-value trades profit by betting on unusual pricing relationships between securities, anticipating a return to an historically modelled “normal” state between them.

This kind of trading can be highly successful in periods following market dislocations. “The strategy has delivered positive returns in every one of the past 15 months. Its last down month was in December 2008,” said Ken Heinz, president of HFR. “The outperformance is testament to the magnitude of the dislocations that have hit financial markets.”

Relative-value strategies have also been big beneficiaries of many banks’ decisions to close their own proprietary trading operations, which in many instances dominated bond markets before the financial crisis.

Strong relative-value funds this year include the $2bn Pars IV fund run by Pimco’s Bill Gross. The fund was up 5.6 per cent as of the end of March, according to an investor.

Element Capital, a $1.4bn relative-value fund run by Jeffrey Talpins, is up 8.88 per cent so far this year. The fund returned 70.77 per cent in 2009, according to an investor in the fund.

Capula Global – one of the world’s largest relative-value funds – has seen its $4bn flagship fund return 2.21 per cent so far this year. The fund returned 12.22 per cent in 2009.

Other relative-value strategies such as convertible arbitrage – betting on pricing inefficiencies within capital structures – have also fared particularly well.

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