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Hedge fund assets to reach USD1.86trn in December 2010

Hedge fund assets to reach USD1.86trn in December 2010

The global hedge fund industry will have USD1.86trn of assets at the end of December 2010, according to a report on 2010 hedge fund themes by Lipper.

Global hedge fund assets were estimated at USD1.55trn at the end of September 2009, rising to USD1.60trn at the end of December.

Lipper believes the global hedge fund industry will be at about USD1.86trn at the end of December 2010, slightly above June 2008’s reading, for a growth rate of 16.24 per cent year on year under the assumption of an average ten per cent annual performance in 2010 and USD100bn net inflows.

According to the report, the competitive landscape in the absolute return segment will get crowded throughout 2010, with absolute return products other than hedge funds becoming increasingly popular among institutional investors. Hedge fund managers will aggressively launch Ucits-compliant hedge fund-like mutual funds to penetrate retail and institutional segments.

Lipper says managed accounts with single managers will be a true growth story in 2010 because of institutional investor and specialised fund of hedge fund demand. There will be an asset management barbell growth favouring ETF products and uncorrelated and diversified absolute return collective investment vehicles.

The report says the hedge fund investor mix is changing. Among high-growth investors can be listed corporates, public pension plans, insurance companies, banks, small- to mid-sized endowments, Asian private banks, Australian institutional investors, Scandinavian institutions, and family offices.

At the beginning of the new fiscal year in April 2010 Japanese pension plans will likely rebalance their portfolio holdings in favour of international stocks—matching domestic and foreign stock allocation, decreasing exposure to domestic equities amid expectations of the Japanese stock market faltering in 2010 and Japanese yen depreciation. Allocation to alternative investments of Japanese pension schemes will remain in the five per cent region.

Institutional investors will focus more on capital preservation and non-correlation in their asset allocation decisions and to a lesser extent on absolute performance.

Lipper says multi-strategy hedge funds might be the losers in the forthcoming round of AUM growth. De-correlation drivers in portfolio allocation will weigh, as well as the FoHF segment shrinking. Investors will remain very sensitive to another steep equity market sell-off.

Conditions in equity markets will be choppy in 2010: fundamentally driven long/short portfolios will be among the winners, along with macro and niche emerging strategies. Risk arbitrage will be among the top-performing strategies, with Europe and Asia benefiting the most as the positive trend resumes in those two regions.

Merger arbitrage strategies might benefit from a pickup in M&A activity throughout 2010. At the same time long/short equity managers might profit from speculative drivers’ bidding on changes in performance ranking and rating agencies’ credit watch of acquiring companies.

The healthcare sector appears to be promising in perspective, potentially leading an M&A recovery. Amid a slowdown in M&A activity over the past two years, there were a lot of deals in the pharmaceuticals industry, led by Pfizer’s USD68bn takeover of Wyeth and Merck’s USD41bn deal to acquire Schering-Plough.

Lipper says average M&A premiums in the sector signal that the market is active and set for an uplift. The average M&A premium for the initial months of the second half of 2009 in the healthcare sector was 51.8 per cent. The last time it reached a similar level was during the healthcare boom in 2006, when 14 deals recorded an average premium of 36.1 per cent.

Dedicated short-bias might be a bright spot, since geopolitical disturbances will weigh throughout 2010. Asset-focused and non-correlated portfolios should be the best/highest performing absolute return vehicles.

According to the report, the FoHFs segment will continue shrinking in 2010 from 33 per cent of total AUM at 2009 year-end to under 25 per cent in 2010, since flaws in the business model (limited diversification and easier direct access to underlying managers) will weigh. This will have a significant impact on marketing policies of FoHFs, with further pressures on fees.

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