Hedge funds buoyant after assets surge
By Sam Jones in London
Published: July 21 2009 13:23 | Last updated: July 21 2009 20:23

Hedge fund managers forecast that a wave of investor cash would flow into the industry in coming months after evidence of the best quarterly performance by many funds in a decade.

Total assets under management by the world’s hedge funds rose more than $142bn in the second quarter of 2009, reflecting the strong performance of the industry as a whole, according to figures published on Tuesday by Hedge Fund Research.

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Outflows from clients slowed to $42bn, from a peak of $152bn in the quarter following last September’s collapse of Lehman Brothers, and are expected to turn positive in the coming months as investors begin to reallocate funds to the industry.

A leading hedge fund manager, who declined to be named, said “This is the best time for generating alpha [peer outperforming returns] in 10 years.

“These are historic times to invest both for funds themselves and investors in funds.”

Net of client outflows, the hedge fund industry currently manages assets worth $1,430bn, according to HFR, up $100bn from its nadir in March.

Many of the world’s larger hedge funds have begun to see net inflows from investors. Pension funds and other large institutional players are beginning to look at increasing their allocations.

Some UK-based hedge-fund managers said they were expecting large allocations about September, by which time many pension fund trustees would have met to approve portfolio allocation strategies.

Another manager said: “If you’re a pension fund looking at increasing your portfolio’s alternative asset weighting from 1 per cent to 10 per cent, that’s an absolute wall of money”.

The Universities Superannuation Scheme, the UK’s second-largest pension fund,, said this month that it was quintupling its hedge fund allocation to about £1.25bn, to be invested over the next two years.

Pension funds are coming under increasing pressure to deliver higher returns on their portfolios. US funds were likely to be a particularly large source of hedge fund investment in coming months, said managers.

Research by Standard & Poor’s shows defined benefit pension plans at S&P 500 companies will be underfunded by $312bn by the end of this year.

One investor said it was actively “seeking capacity” in investment deals – having the option to invest more as and when they can.

“We anticipate many funds will start closing their doors to investment before too long.”