Hennessee annual survey indicates slow but steady growth

In the face of difficult and volatile equity markets, the Survey results indicate that hedge funds met or exceeded expectations for 82 per cent of hedge fund investors. This, in addition to the 5 per cent growth in industry assets, from US$563 billion to US$592 billion, illustrates that hedge funds are growing in use for portfolio diversification and downside risk protection.

The 5 per cent growth is the smallest dollar increase since the Survey began in 1998 and, according to other Hennessee Group research, is the lowest percentage growth since 1974.

Hedge funds were strongly tested in the turbulent market conditions that defined 2002. Accordingly, the Hennessee Hedge Fund Index experienced its first down year since inception in 1987, finishing down -3.43 per cent. In comparison, the S&P 500 finished down -22.19 per cent, the Dow Jones Industrials Average fell -16.76 per cent, and the NASDAQ declined -31.52 per cent.

Elizabeth Lee Hennessee, Founder and Managing Principal of Hennessee Group LLC. said: "The performance of hedge funds in 2001 and 2002 has made it increasingly prudent to consider hedge funds as an equity or bond investment within traditional asset allocation. Someday, we believe it will be considered imprudent not to include hedge funds within a stock and bond allocation."

Other relevant findings from the 2003 Hennessee Hedge Fund Investor Survey include:

* Since the turn of the century, the hedge fund industry has grown by 82%, from US$324 billion to US$592 billion.

* The largest investors in hedge funds continue to be individuals and family offices, comprising 56 per cent of the capital in the industry.

* Hedge fund investors continue to have approximately one-third of their investable net worth in hedge funds.

* The largest increase in hedge fund investments came from endowments, with a jump from 6 per cent in the 2002 survey to 16 per cent in the 2003 survey.

* 43 per cent said they would increase their hedge fund investment in 2003, while 25 per cent said they would increase their fund-of-fund investment.

* Convertible arbitrage and distressed styles were the most frequently chosen, both appearing in 61 per cent of hedge fund portfolios.

* 30 per cent of hedge funds use a multi-manager product for their traditional investments while 50 per cent are using a multi-manager product for their hedge fund investments (i.e., FOFs).

* Transparency (20 per cent) and Liquidity (18 per cent) are the two most important issues for investors in hedge funds.

Background Note: The Hennessee Group LLC conducts its Annual Hennessee Hedge Fund Investor Survey to provide insight to the firm’s advisory clients, as well as the investment community as a whole.

The Hennessee Group is a pioneer in hedge fund investments and currently advises on over US$1 billion of assets. Invested in 125 different hedge funds, all portfolios are customised to fit each investor’s investment objectives and risk parameters. The Hennessee Group does not market individual hedge fund managers nor fund of funds.