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Hedge fund assets rise to USD2.8trn, says asset flows report

The combined assets of the global hedge fund industry grew by just under 4 per cent in the last quarter of 2007 to an estimated USD2.79trn, but net new allocations fell to their lowest level since the end of 2005, according to a supplement to the 2008 Hedge Fund Asset Flows & Trends Report published by and Institutional Investor News.

The report says the fourth quarter increase in assets of 3.98 per cent represented a decline in the level of growth from 9.82 per cent in the final quarter of 2006. Performance accounted for USD68.06bn of this year's fourth quarter increase in assets, while new allocations of USD42.80bn were slightly offset by an estimated USD4.16bn in liquidations.

The net additional allocation of USD38.64bn was the smallest since the fourth quarter of 2005. Hedge funds attracted USD365bn in new assets throughout 2007, down from USD410.56bn the previous year. Excluding performance gains, the industry grew by 16.95 per cent last year, compared with 26.81 per cent in 2006.

Fund of hedge funds assets grew by 4.63 per cent in the fourth quarter to an estimated USD1.338trn, an improvement on the increase of 2.39 per cent between July and September, but mostly the result of performance gains.

Fund of funds attracted USD35.88bn in new assets in the fourth quarter and USD170.05bn throughout 2007, a figure again down from USD215.17bn in 2006. New allocations last year lifted total assets by 15.77 per cent, compared with 27.62 per cent in 2006. Fund of funds accounted for 48 per cent of total hedge fund assets at year-end, a slight increase from the end of September but down from 50 per cent a year earlier.

Despite performance gains during the fourth quarter, investors made net withdrawals from equity-focused hedge funds, perhaps reflecting sentiment among large institutions that the asset class had become over-valued. An estimated USD1.5bn exited equity-focused funds during the quarter, the first outflow for this category on record.

However, performance lifted total assets to USD1.07trn, in increase of 1.74 per cent from the previous quarter. Fixed income-focused fund assets rose 7.59 per cent during the fourth quarter, thanks in part to net allocations of USD15.09bn. It was the second quarter in a row in which investor allocations accounted for a larger percentage increase in fixed income strategies than equities.

Total assets in distressed hedge funds, one of the fastest growing strategies over the past two years, rose 7.04 per cent in the fourth quarter to an estimated USD228.83bn. Although the average distressed fund lost 0.66 per cent during the quarter, larger funds performed well enough for performance gains to account for the vast majority of the total increase in assets. Throughout 2007, distressed hedge funds gained USD44.06bn in new assets, up from USD28.70bn the year before.

Performance losses in August was probably the cause of emerging market hedge fund allocations being essentially flat in the fourth quarter with net inflows of just USD3.2m, but performance gains helped raise total assets 5.21 per cent to an estimated USD314.58bn.

The losses in August were followed by redemptions in September, and losses again in November caused more outflows in December. However, over the full year emerging market funds attracted USD48.00bn in new assets, up from USD38.88bn in 2006; excluding performance, assets grew by 22.64 per cent last year, compared with 31.50 per cent in 2006.

With the average global macro fund returning 2.96 per cent in the final quarter, a combination of performance and new allocations helped push total assets up an estimated 8.90 per cent to USD149.29bn. New allocations were some USD5.35bn, compared with a new outflow of almost USD2bn in the fourth quarter of 2006.

Throughout the year, macro funds took in an estimated USD10.44bn, down from USD17.48bn in 2006, but despite the decline in new assets macro funds appear to have stemmed a trend of redemptions that saw three consecutive quarters of net outflows in the second half of last year and the first three months of 2007.

Long/short equity fund assets grew at a slower pace than the industry as a whole for the first time since the third quarter of 2006, and only the second time on record. Total assets in long/short equity funds grew an estimated 1.75 per cent to USD810.74bn, but with a net outflow of USD310m in the fourth quarter, the increase in assets was solely due to performance gains.

Strong movements in commodities, currency and interest rate markets made CTA/managed futures products one of the best performers in the fourth quarter with an average return of 5.78 per cent, while USD3.64bn in new money helped lift total assets 7.24 per cent to an estimated USD163.63bn. Throughout 2007, CTA/managed futures attracted an estimated net USD18.77bn, a sharp turnaround from 2006 when some USD1.09bn was withdrawn.

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