Global hedge funds’ assets totalled USD1,902 billion at the end of 2011 according to TheCityUK’s report Hedge Funds 2012. Although a 3% reduction from the previous year, it follows two successive years of growth that have seen assets increase by around a quarter.
Assets remain down on the 2007 peak but overall have risen 237% over the past decade. The number of hedge funds totalled over 9,800 at the end of the year, with new hedge fund launches outpacing fund liquidations for the second year running.
According to the report, the net inflow in funds is set to continue in 2012 as many institutional investors are increasing their allocation into alternative investments. The USD70bn net inflow during 2011 was, however, offset by a 4.6% performance loss, the first year of negative returns in the last three years. Most of the losses came in the third quarter when global equity markets fell by around 17%. Returns vary from year to year but overall hedge funds have had an average annual return of 6.3% during the past decade.
Marko Maslakovic (pictured), Senior Economist at TheCityUK, says: “London remains by far the dominant centre in Europe, managing around 85% of European based assets. The structural advantages which have attracted around 800 hedge funds to London include its local expertise and the proximity of clients and markets. The UK is also a leading centre for hedge fund services such as administration, prime brokerage and custody.”
TheCityUK estimates that 42% of global hedge funds’ assets were managed from New York in 2011, down from over 50% a decade earlier. London’s 18% share of global hedge funds’ assets was slightly down on the previous year, but more than double its share ten years ago. Europe has seen a fall in its share of global industry assets during the year, a result of sovereign debt problems in the region which have contributed to a net outflow of funds. Asia is taking on a more important role, although this is more as a source of funds than a location for management. The UK and the US are leading locations for management of Asian hedge fund assets with around a quarter of the total each.
Regulation of hedge funds is being tightened in the wake of the financial crisis. The new regulation in the US, UK and across the EU is impacting the market. According to TheCityUK, a level playing field needs to be maintained globally to ensure that the hedge fund industry in the UK and across the EU remains competitive.