Rising risk appetite spurs hedge fund investment to record high

A renewed quest for risk and rising investor optimism drove capital invested in the global hedge fund industry to a record high in the fourth quarter of last year.

Total capital rose by $120 bn ‒ or 4.6 percent ‒ in the fourth quarter to $2.63 tn, according to industry research firm Hedge Fund Research (HFR). About $10.5 bn of that increase came from new net inflows, with the rest coming from rising asset prices. The fourth quarter marked the sixth straight quarterly rise in total capital invested in hedge funds.

‘The powerful increase in investor risk tolerance drove strong capital flows into hedge funds as both institutional and retail investors positioned for greater intra-market equity dispersion across equity portfolios,’ says Kenneth Heinz, president of HFR, in a press statement.

A trend that has seen a concentration of assets in the larger hedge funds over recent quarters slowed this quarter, HFR figures show. Investors placed $5 bn with hedge funds that have more than $5 bn under management while they invested a total of $5.3 bn with funds that manage between $1 bn and $5 bn. For the full year, they allocated $40 bn to the larger funds and $16.6 bn to the smaller category.

The HFRI Fund Weighted Composite Index, the broadest measure of hedge fund performance tracked by HFR, rose 9.2 percent in 2013, led by equities-focused funds. Funds with a strategy of shorting were the biggest losers as the Short Bias Index dropped 16 percent. Funds focused on technology and healthcare performed best, driving HFR’s Technology/Healthcare Index up by 22.6 percent.

Among funds specialized in emerging markets, those focused on Asia performed the best last year, as HFR’s Asia ex-Japan Index jumped 11.4 percent, HFR data shows. The Russia/Eastern Europe Index gained 3.1 percent while the Latin America Index declined 7.1 percent. The HFRI Emerging Markets Index, which takes into account all regions, climbed 0.5 percent.