The performance of hedge funds industry

Abstract
The purpose of this study was to investigate the performance of the hedge fund industry, in the context of its past performance, present and the likely future trends of the industry. The data to address the purpose this study was purely obtained from secondary sources; books, journals and websites which contained relevant material to the hedge fund industry. The study revealed that the hedge fund industry has growth steadily over the decades begging with many investors interest in the asset class in the 1960’s. The growth in number of funds asset under management was particularly high in the period 1990 to 2002. The growth was punctuated by a slight decline in 2005 and a major decline in 2008 due to the global financial crisis. The future of hedge fund industry will be characterised by increased regulations, few consolidated funds and less propensity to risk due to low leverage ratios. A bounce back from the 2008 decline is an indicator that the hedge fund industry will continue to record positive results.

THE PERFORMANCE OF HEDGE FUNDS INDUSTRY

1.0 Introduction
A hedge fund assumes both short and long term positions; it uses arbitrage, trades in bonds and buys and sells undervalued securities. The main feature of hedge funds is investing in every opportunity regardless of the market where impressive gains at a low risk are foreseen. The strategies used in hedge funds vary greatly with a majority hedging against market downturns; this is particularly of importance today when stock markets are experiencing high volatility and anticipated corrections. Hedge funds are intended to reduce risk and volatility at in the process while delivering impressive returns and preserving capital under all market situations. There are differences in the strategies used by various hedge funds which result in differences in volatility, risk and investment returns (Ackermann, McEnally & Ravenscraft. 1999, p.850). For instance, strategies not correlated with equity markets deliver returns with very low risks of loss coupled with consistency of the returns while at the same time some hedge fund rival the volatility found in mutual funds. A fund of funds is a highbred consisting of a combination of various strategies and classes of assets, and provides long term investments that are stable which cannot not be matched by any individual fund (Agarwal, & Naik, 2000a, p.4). Endowments, private banks, pension funds, insurance companies and high net worth persons are the main investors in the hedge fund market, their aim is to minimize the volatility of their portfolios and enhance returns simultaneously (Magnum Funds, 2010, pars. 1-4).

The hedge fund industry is valued at $1 trillion with a growth of 20 percent per annum. There are 8350 actively traded hedge funds in the industry. These hedge funds use a variety of strategies to invest, some use derivatives and leverage while others use little to no leverage being conservative in nature. Many hedge funds performance is not correlated to bond or equity markets hence are not exposed to market risk.  The industry is characterized by sophisticated investors including several Swiss banks and other private banks (Magnum Funds, 2010, par. 5). Hedge funds appeared in the market in the mid 1940’s, since then they have generally seen an increased growth in terms of variety and assets under management. The first hedge fund was introduced by Alfred W. Jones with an aim of hedging risk in the market place using short selling and leverage. This hedge fund outperformed the mutual funds that existed at the time, but they did not spark interest amongst investors until the early 1960’s. George Soros and Warren Buffet became interested in the hedge fund strategy and since many hedge funds have appeared in the market (Hedge Education, 2010, par.2). The hedge funds game however turned sour in 2008 due to lock ups and negative returns as markets crumbled across the world. The losses that were accrued were slightly over 30 percent with a drastic decrease in assets under management. This made investors go for cash investments such as treasury bills.

Yet the strategies employed by hedge fund managers enabled some to reap returns in the volatile market even during the financial crisis. Despite the setback a study by PerTrac Financial Solutions in 2009 found out that money is still flowing to hedge funds investments, showing a keen interest on this asset class among high net worth individuals, endowments and institutions. The study also found out that the assets managed in the hedge fund industry increased 5.5 percent in comparison over the past year, this increase made the industry have assets under management of slightly over $1.4 trillion in offshore and on shore funds. This follows a huge drop in assets under management of 36.1 percent in the year before. Further the study found that the number of fund of hedge funds and hedge funds reduced by 8.6 percent from the past year which means that some funds never reported their results or were made to close operations (Alaboutalpha.com, 2010, pars. 1-3).

 In the last decade the hedge funds industry has grown in leaps and bounds, with only 300 hedge funds in 1990 to a staggering 10,000 hedge funds currently. The hedge funds have gained very high visibility in the market and among the press. The initial strategy of hedge funds was to hedge by leverage and short selling, today fund managers use strategies that are not hedge at all, and hence hedging does not always apply in hedge funds. In fact a majority of hedge funds are meant to gain absolute returns making them highly speculative (Agarwal, & Naik, 2000b, p.20; Agarwal, & Naik, 2000c p.342).

The hedge fund industry bounced back easily after the financial crisis, its popularity also went up. This class of investment is always misunderstood and its future is uncertain. This paper looks into the past performance of the hedge fund industry and the prediction of its likely future performance.

2.0 Chapter One
2.1 Past Performance
The hedge fund industry is still a niche and infant market, with the estimates of its size rare to come about and fluctuating. Mutual funds appeared earlier in the market and their growth has been high compared to the growth of hedge funds. The mutual funds experienced a rapid growth before the hedge funds took off; 1980 is the year that mutual funds started experiencing their high growth while hedge funds started to grow in 1990 (Fung & Hsieh, 2000, p.300).The fast growth rate period for mutual funds lasted for slightly more than 15 years from 1980 to1997. It is granted that the fundamentals that are driving growth in mutual funds are different from the drivers of growth for hedge funds (Fung & Hsieh, 2001, p.340).

 However, if it is assumed hedge funds’ and mutual funds’ growth circles will be parallel to some extent then one would make a conclusion that hedge funds are in their journey to growth, and the growth would last see Figure 6.1 in the appendix.  As per 2001 the estimated number of funds in the industry was ranging from anywhere between 2,500 and 6,000 and global assets under management estimated between $500 and $600 billion, this figure is relatively small compared with the pension fund industry. Assets under management in the global pension fund industry increased from $4.6 trillion to $15.9 trillion, between 1990 and 1999. Figure 2.1 below shows the hedge fund industry size and growth.

Figure 2.1: Estimated Growth of Hedge Fund Assets

Source: Hedge Fund Research, Inc.

From Figure 2.1 above: the assets under management increased from $38.9 billion to $536.9 billion between 1990 to the end of 2001. The industry grew annually by 29.3 percent with a compounded annual growth rate of 26.9 percent. 1997 experienced an accelerated growth, the funds which were mainly directed to fixed income arbitrage. The annual growth rate for 2000 was 6.8 percent and 10.1 percent for 2001; the main recipients of this growth were long/short equity, risk arbitrage and convertible arbitrage (Miura, Tetsuda & Shimizu, 2006, p.2). The growths match with the returns accrued from the HFRI Hedge Fund whose composite index was 5.0 percent. Put differently the assets grew partially due to funds inflow and partially due to fund performance (Ineichen, 2002, p.39). The growth and size as relates the number of funds is shown in Figure 2.2 below in the same period.

Figure 2.2: Estimated Growth of Hedge Funds

Source: Hedge Fund Research, Inc.

Based on these estimates by Hedge Fund Research Inc, 4,191 hedge funds were in operation by 2001. The number of hedge funds grew by an average of 19.7 percent per annum. Nonetheless the annual growth rate has been declining all through the 1990’s. One would expect a fall in growth as the industry matures and that the growth rate would decrease to a low of 8.2 percent in 2001 considering the removal of entry barriers giving an incentive for fund managers to form a hedge fund. The California Public Employees’ Retirement System $150 billion did go well with the hedge fund industry. This followed a 31 August, 1999 announced that it would invest $11 billion in investments that were hybrid that included hedge funds. The announcement was perceived as a confidence vote in the hedge fund asset class coming after the collapse of Long Term Capital Management a U.S hedge fund. The alternative investment sector has been ventured into by a majority of sophisticated and large investors for years, the announcement by California Public Employees’ Retirement System acted to further legitimise alternative investment segment for institutions with large capital seeking for alternatives to their stock markets (Ineichen, 2002, p.42; Lochoff, 2002, p.90). In Europe, the EuroHedge estimated that the assets under management in 2001 was about $64 billion (Figure 2.3), representing 11 percent of $500 billion to $600 billion which make up the assets under management in the hedge fund industry.

Figure 2.3: Assets under Management by European Hedge Funds

Source: Wall Street Journal Online (2002).

The growth rates in Europe were 80 percent (1999), 65 percent (2000) and 40 percent (2001). The largest percentage of growth in Europe is attributed to private investors and not institutional investors (Amin, & Kat, 2002, p.36). According to a survey conducted by Ludgate Communications (2000), institutional investors in Germany did not put into consideration the possibility of investing in hedge funds. After an increase in the number of funds of hedge funds and hedge funds in the period preceding 2002, these funds started declining in 2005 and were further driven to decline by the global financial crisis (Alaboutalpha.com, 2010, pars. 4). The figure below shows the number of new funds in the hedge fund industry.

Figure 2.4: Number of new Hedge funds by year

Source: Pertrac, 2009

The performance seen above directly correlates with the performance of the number of new fund of hedge funds by year as illustrated in Appendix Figure 5.1. During the year 2009 and first quarter of 2010, 7,050 different funds of hedge funds were present in the market. 6,300 of these funds reported on their returns in 2009, and 10 percent of the funds that reported their returns were in the U.S. while 90 percent were domiciled outside the U.S. an approximate of $580 billion is invested in hedge funds via funds of hedge funds, the investment which represents a 22.7 percent decline in the amount of assets that managers manage through funds of hedge funds from the previous year. At is stands now the number of funds of hedge funds launches continue to decline. The launching of new hedge funds decreased immensely in 2008, solely due to the worst condition of the financial market. However the trend is being reversed, the number of new fund launches is slowing returning to the hedge fund industry starting quarter four of 2009 and quarter one of 2010, but the new launches will take awhile before they reach the level and number of launches that were initially in the industry (Alaboutalpha.com, 2010, pars. 6).

The major challenge in 2008 for hedge funds was purely survival, the reversal of the trends in 2009 were impressive of the hedge funds in a comeback to the industry. The successful come back was against some prediction by a section of analysis who had pronounced doom on the hedge fund industry.   Hedge funds recovered much of that which was lost in the financial crisis of 2008. All strategies expect managed futures managed a bounce back from 2008. Therefore while many counters have lost, investors who had their money in hedge funds have recovered much of their lost money in the due to the global financial crises. By mid 2009 the global assets under hedge funds were over $1.7 trillion, and by end of 2009 the assets stood at $1.85 trillion slightly outdoing the end of 2008 industry total of $1.83 trillion (Credit Suisse, 2010, p.7).  The modest positive trend is attributed to the support from willing institutional investors who continued to allocate to absolute return investments in a volatile market environment. The past year firmly confirmed the trend towards consolidation in the hedge funds industry.  The Global Billion Dollar Club currently accounts for $1.5 trillion assets and the largest billion-dollar corporations continue to their growth trend. The asset location reveals that the UK and the US are still deeply entrenched as the preferred locations for hedge funds. The hedge fund industry having undergone illiquidity trauma during the global financial crisis when investors were confronted with side pockets and gates, its investors are demanding high levels of liquidity and transparency from hedge fund managers (Getmansky &. Makarov 2003, p. 43). There is increased need for due diligent, which would be a response to insider trading and fraud cases, hence the need for products that comply with UCITS II as well as managed platform accounts. The barriers to entry in the hedge fund industry are also on the rise, this is because institutional investors who are the main market for hedge funds are looking for hedge fund managers with strong infrastructure and large capital base. As a consequence billion-dollar launches have been made common phenomena. In the world hedge fund industry Europe had the least number of new funds since 2000 in the year 2009 (Cohen, & Wilson, 2010, par.5).

2.2 Hedge Fund Performance Analysis
2.2.1 Overall hedge fund performance
Hedge funds are part of the alternative investment segment. In this section the performance of the alternative investments will be compared in terms of return and correlation from 2000 to 2006.

Figure 2.4: Performance of Hedge Funds over time

Source: (Aldrich, 2007, p.6)

Figure 2.4 above shows a time series of FTSE hedge composite against MSCI World Index. Over the time series the FTSE Index has outdone the MSCI index; this is attributed to less volatility. The MSCI performance in the first half of the time series presents is largely difference with its performance in the second half of the time series. During the first three years the hedge funds were getting positive gains while the MSCI lost a lot of value. In this scenario hedge funds precisely performed their intended purpose; give absolute results even when markets are diminishing. In the first half of the time series there is no correlation between the global equity markets and the hedge funds. However the lack of correlation is overturned in the second half of the time series with the equity markets performing better than the hedge funds, not withstanding a high level of volatility. Figure 5.3 in the appendix shows the systematic increase in correlation between equity markets and hedge funds as shown by their individual indices. The figure illustrates the rolling nature of the correlation between MSCI World Index and the FTSE Hedge Index in the time series under review. The convergence between hedge funds and equity markets reflects a style shifts among successful funds as they become larger (Aldrich, 2007, p.7).

2.2.2 Hedge fund performance by category
Hedge funds can be decomposed into three major constituents: non directional, event-driven, and directional. From the figure 2.5 below; the directional strategies dominated in the second half of the time series under review while the non directional had dominance in the first half. The recent decline in equity markets impacted the directional strategies most making the overall index to experience a downturn. The event driven strategies had an impressive performance in the second half despite a poor earlier performance (Aldrich, 2007, p.7).

 Figure 2.5: Hedge Fund Index Performance by category

Source: (Aldrich, 2007, p.8)

3.0 Chapter Two
3.1 The hedge fund industry performance during the Global crisis
In 2008 the hedge fund industry declined by an estimated 30 percent to a low of $1,500 billion as shown in Figure 5.4 in the appendix. The fall was the largest on record and was due to a liquidation of funds, negative performance and an increase in redemptions. The reduction in assets under management in 2008 was partly due to asset outflows through redemptions and partly due to negative performance of the hedge funds. As shown in Figure 3.1 below. Regionally, in emerging markets and Europe the decline was mainly due redemptions by investors. On the other hand the Japan and the U.S experienced declines mainly due to losses that were accrued from the investments. Asia experienced the highest levels of liquidations. On average a hedge fund declined by 15.7 percent in 2008, the worst in history of the hedge fund (see Figure 6.5 in the appendix). The losses on hedge funds were so wide spread with almost three-quarters of the hedge funds making losses. 85 percent of the funds of hedge funds lost their money. Even so the hedge funds surpassed many other markets for instance the S&P index which declined by 38 percent (Brown, Goetzmann, & Park, 2009, p.95). Much loses were experienced between the September and November of 2008.

Figure 3.1: Net asset flow and returns

Source: (IFSL, 2009, p.1)

The collapse of banks in Europe and the U.S. the main providers of service to the hedge fund industry were some of the main reasons that led to the decline of the hedge fund industry. The other factors were: the decline in equity markets, pressure for liquidity to cater for redemption and margin calls and the banning of short selling. The returns to investors from hedge funds were 13.2 percent on assets for 2008. The increased number of redemptions was due to risk aversion, losses and the damage on reputation after the massive fraud by the guru fund manager Madoff. This period was the second time in the past two decades that the hedge fund industry experienced an annual outflow of investor funds. Positive inflows in the first half of the year were overwhelmed by outflows experienced in the second half. The third and fourth quarter of 2008 recorded consecutive records in quarterly redemptions. Data from the industry reveals that for the first two months of 2009 investors continue to withdraw money form the hedge funds with $115 billion returning to fund managers during the same period. Firms whose primary market is institutional investors had better returns and prospects that individual investor centred companies. The withdrawals were not particular but were spread across asset sizes, fund strategies and regions. The increased withdrawals forced some hedge funds to suspend withdrawals to the end of 2008, since the sale of illiquid assets had the possibility of exposing the non withdrawal investors to bigger losses. The number of hedge funds in 2008 declined to 10,000, a 10 percent decline. Most closures of the hedge funds however came in latter part of 2008 (Figure 6.4 in the appendix). The fall in the number of hedge funds was due to lack of liquidity, redemptions to invest in safer investments and losses. Only a quarter of funds in the hedge fund industry are fund of hedge funds while the rest are hedge funds. The assets of fund of hedge funds declined nearly by a third to an approximate value of $600bn in 2008, the $600bn made up a 40 percent of the total assets of global hedge funds. The decline came about after a decade of growth as shown in Figure 3.2 below.

Figure 3.2: Global Fund of hedge funds industry

Source: (IFSL, 2009, p.3)

When the funds of hedge funds are broken down by manager location, the U.S is the most preferred location having a 28 percent share of the market, 24 percent were managed in the U.K, and among other important locations were Hong Kong, Switzerland and France (Figure 6.6 in the appendix). As a strategy to deal with the decline in liquidity a majority of the funds of funds cut down on their performance and management fees to lure new investments at the same time retain the existing investors. It is worth noting that the number of fund of hedge funds have increased immensely over the past decade, these funds are publicly quoted. They are mainly listed on Zurich and London exchanges. In 2006 London overtook Zurich in the funds of hedge funds listing. The asset value and prices of a large majority of the listed fund of hedge funds declined during 2008. Losses and reduced liquidity concerns led to large sell offs in the industry (Aldrich, 2007, p.9).

The hedge fund industry is tended to concentrate at the top end during the past decade. Fund consolidation increased sharply in 2008 as fund closure became more common and new fund launches declined.  After emerging from the economic slowdown the industry is characterised by a concentration of assets among large funds. With the hedge funds that make up the top 100 accounting for three-quarters of the hedge industry assets during 2008. This was an increase from 54 percent in 2003 (Figure 6.7 in Appendix).  The largest fund was Bridgewater Associates with assets under management of $38 billion by the end of 2008, JP Morgan came second, its assets decreased by 26 percent to $33 billion in 2008,  Paulson & Co is third with $29 billion in assets under management. The hedge fund attrition rate was 10 percent in 2008, which was very high compared with the rate of the previous decade which averaged 3 percent and 5 percent (Figure 6.8 in Appendix).

The hedge fund service providers were not left untouched by the global financial crisis. Prime brokers for example whose income in mainly accrued from cash lending in support of leverage as well as stock lending to enable short selling, were adversely affected in 2008. London accounts for over 90 percent prime broker services in Europe. This is because the major investment banks have their headquarters in London or their major offices are located in London. The revenues for prime brokers has suffered greatly as liquidity increased, deleveraging set in and hedge fund assets declined as a direct result of the credit crisis.  In fact investment banking hedge fund revenues dropped by 45-55 percent in 2009, a drastic drop from the $60 billion (or 21 percent of revenue), peak performance in 2007. The slowed business forced some prime brokers to provide their services to non-hedge funds market for example pension and sovereign wealth funds. Prime brokers also underwent major restructuring in the year 2008; this includes the JP Morgan acquisition of Bear Stearns, the Barclays Capital takeover of Lehman Brothers and the Bank of America’s acquisition of Merrill Lynch. The restructuring shifted the market share to commercial banks from investment banks. The major prime brokers in 2008 according to the number of clients were Morgan Stanley, JP Morgan, and Goldman Sachs with each having a 10 percent stake of the market. The restructuring has brought other player on board making the total number of key players to be six with a market share that is equal. Bear Sterns, Morgan Stanley and Merrill Lynch were the key players before the credit crisis. With the closure of many prime brokers hedge funds will have to use two or more prime brokers (Aldrich, 2007, p.10). Hedge fund managers often times outsource some of their functions. These functions include risk analysis, accounting and investor services (Agarwal, Daniel & Naik, 2003, p.6). Assets administered by third party fund administrators declined by 30 percent in 2008 after a decade long steady increase. 90 percent of all third party fund asset managers recorded a decline in the assets under their administration in 2008.  The leading fund administrator Citco Fund Services weathered a 24 percent fall in the assets under its management to maintain its position. The fall was experienced in 2008’s second half to make the new value of assets under management at $375 billion.  State Street Alternative Investment Solutions came second while Goldman Sachs Administration Services was ranked third.

3.2 The future performance of hedge funds
Hedge funds failed to deliver returns that are absolute and uncorrelated to other markets during the financial crisis of 2008.  The performance of the hedge funds during the crisis can be attributed to the peculiar nature of the world liquidity crisis. The crisis saw increased counterparty risk and resulting defaults, introduction of regulations that were arbitrary which acted to curtail hedge fund investing and forced deleveraging witnessed during 2008. Hedge funds delivered less that what they had promised investors. However a notable feature about the financial crisis is its duration and not necessarily its size. It went over 11 months showing the extent of the systematic financial crisis and its impact on markets. It is not a surprise therefore directional hedge funds were hurt by the vicious correction of the market during the third quarter. Additionally leverage based strategies were impacted negatively by rising cost of margin calls and funding. During crisis leveraged strategies tend to be the worst hit. The strategies that survived the financial crises were the ones that perform well in during self-enforcing cycles-CTA or global macroeconomic shifts -global macro (Eichen & Longo, 2010, pars.4-5). These two funds go for liquid investments; they have simple underlying models and have the ability to exploit drastic market draw downs and irrationality. Their long volatility makes their attractiveness increase with market turbulence. The nature of the financial world has changed drastically; banks are now partly government owned, the liquidity problem is not yet fully over, there is great uncertainly as to the impact of government bailouts and increased regulatory measures and market players are expecting continued increased volatility until the credit markets regain normalcy. Regardless of the time when the crisis will be fully handled, the future performance of the hedge fund industry; it’s potential to provide risk-adjusted absolute returns will be largely influenced by three things. Fewer risk takers, who are less active in number and assets, lower levels of assets in the industry in the medium term and a rapidly changing legal political environment in terms of regulations and uncertainly of government actions impact on markets. So far the liquidity crisis has forced the collapse of global investment banks with some ceasing to exist like Lehman Brothers and others have been acquired by commercial banks. These banks now can access financing from the treasury and since they operate in highly regulated environment they will be forced to significantly reduce their leverage ratios. Independent investment banks had pre crisis leverage ratios of 20-30, regulated banks (a class in which investment banks have found themselves in) have ratios of 10-12.

The likely impact will be two fold. Investment banks will no longer be aggressive risk takers and in their search for Alpha the banks will not compete with commercial banks which used multi-billion dollar leveraged trading strategies. At the same time the lowered appetite for risk implies that hedge funds leverage will be unobtainable and costly. Yet with high risk premiums and distressed asserts, the funds will be less dependent on leverage in their quest to generate high returns. Assuming all other things are held constant, the effect of this will be a positive for the industry. Hedge funds are likely to loose assets in the short term due to redemptions, investor reluctance to invest in low liquidity investments and closures. These will see an increase in the number of hedge funds at a rate higher than the decrease in assets as small funds are hard to manage. This clean up will be positive for the industry, at it will reduce competition for Alpha for the remaining fund managers in the market.  Regulation and government intervention in the hedge fund industry has generated contention in the past (HFI, 2010, par.6). In fact attempts by the U.S government to regulate the industry have always hit a snag. But with the financial crisis politicians have became wary of the unregulated nature of the hedge fund industry viewing it as a source financial malaise. Short selling has been used as a scapegoat for the emphasis on bank’s equity prices leading to the suspension of stocks for shorting financial. The government’s involvement is not likely to subside any time soon; actually hedge fund industry regulation is likely to increase. The regulations will be towards strict registration requirements and intense monitoring.  Though hedge funds flourish in inefficient markets they depend on solid financial integrity among other financial players, if the regulation will make this of hedge funds will be a good move for the industry (Grünig & Herbst, 2009, p. 1-6).

4.0 Conclusion
Hedge funds have been in the market since 1940’s, the main aim of hedge funds is to leverage against market downturns. Initially hedge funds used only leverage and short selling but this has changed with the advent of many other strategies that do not enhance leveraging at all. Since 1960’s there has been increased interest in the hedge fund industry among investors especially institutional and high net worth individuals. The assets under management increased from $38.9 billion to $536.9 billion between 1990 to the end of 2001 with an annual growth rate of 26.9 percent. During this period 1997 had the highest growth with the funds being mainly directed to fixed income arbitrage. The expected fall in growth due to maturity of the industry in 2002 did not occur highlighting the uniqueness of the hedge fund industry. The increase both in number and value of hedge funds prior to 2002 however slowed down in 2005 and declined in 2008. The decline in 2008 was estimate to be 30 percent; assets under management were reduced significantly to a low of $1,500 billion, this was coupled with a reduction in the number of hedge funds by 10 percent to 10,000. The asset reduction came as a result of asset outflows through redemptions and partly due to negative performance of the hedge funds. The losses in the industry were so widespread such that 85 percent of the funds of hedge funds lost their money. Despite the decline the hedge funds performance surpassed the performance of many markets. Therefore while many counters have lost, investors who had their money in hedge funds have recovered much of their lost money in the due to the global financial crises. Prime brokers and fund administrators were hit by the decline in the hedge fund industry. For instance many prime brokers under went restructuring in the year 2008; this includes the JP Morgan acquisition of Bear Stearns. The downturn however did not bring a complete demise to the hedge fund industry. The industry has managed to reverse to some extent the damage done in 2008. In 2009 it was found out that money still flows to the hedge funds investments, there is still a keen interest in this asset class especially among institutional investors. The performance of 2009 was way above 2008’s performance; the total assets under management for 2008 where $1.83 trillion compared to 2009’s $1.85 trillion. This positive trend is attributable to willing institutional investors to venture into absolute return investments.

The future performance of the hedge fund industry hinges on lower assets to be invested in the short term, the increased government intervention and regulation of the industry and lower number and asset value of risk takers. These trends will see increased fund consolidation, risk averse investing and a highly regulated market which will impact positively to the hedge fund industry in terms of returns and investor confidence.

5.0 Bibliography
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6.0 Appendices

Figure 6.1: Comparison of growth patterns: Hedge funds versus Mutual funds

Figure 6.2: Number of new Fund of Funds by year

Source: Pertrac, 2009

Figure 6.3: Increasing correlation between Hedge funds and Equity Markets

Source: (Aldrich, 2007, p.7)

Figure 6.4: Global hedge funds

Source: (IFSL, 2009, p.1)

Figure 6.5: Global hedge fund returns

Source: (Greenwich alternative investments, 2009)

Figure 6.6: Fund of hedge fund assets by manager location

Source: (IFSL, 2009, p.4)

Figure 6.7: Concentration of hedge fund assets

Source: (IFSL, 2009, p.5)

Figure 6.8: Hedge fund attrition rate

Source: (IFSL, 2009, p.7)