Hedge Fund Assets Hit $2.17 Trillion

The EurekaHedge report for February 2015 appeared earlier this week and showed strong growth for the industry in the opening months of 2015. According to the report the hedge fund industry grew its assets by $30 billion to $2.17 trillion in the opening months of the year.

That growth didn’t come from new investments, however. It came from performance based gains. In January investors pulled $12.4 billion out of hedge funds, but replaced almost all of that money with $12.3 billion inflows in February. Performance based asset growth in those months was $24.8 billion and $8.8 billion consecutively.

Hedge fund growth continues despite nervousness
Investors may be nervous about the future of their hedge fund investments, but the hedge funds themselves appear to be doing well. The best results came from hedge funds based in Europe. They benefited from monetary easing across the continent to record returns of 2.29% for February alone. Funds focused on Eastern Europe were the best in that class, gaining 12.49% in that period.

In the month of February hedge funds performed positively across the board, with all regions seeing overall performance-based growth in their assets. Under strategic mandate all but two categories managed positive performance. Relative value funds and distressed debt funds lost $2 billion and $1 billion of their value respectively due to their performance.

Just one category saw net outflows of assets during the month. Hedge funds that specialize in distressed debt investing are being pushed by the belief that interest rates are ready to rise. According to the Eurekahedge report funds looking for opportunities in that area lost $1.2 billion of their total assets during the month of February.

If interest rates rise it will become more difficult for companies with already marginally steady finances to meet their obligations. On the other hand, an increase in interest rates appear to have given a boost to investments in managed futures. Returns in the area weren’t good in February, staying at just 0.1%, but inflows increased the total amount of assets in those funds 2.28% to $218 billion.

Central Bank moves define fund flows
The February report shows that hedge fund flows are still influenced strongly by decisions made in central banks. The biggest inflows in the month of February were seen in hedge funds in Europe. $5.1 billion in total was added to the assets of European hedge funds during February, with $3.1 billion of that coming from new investments.

Long/short equity funds on the continent were some of the major beneficiaries of the increase in asset flows and performance. During February the MSCI Europe Index increased by 6.09%, and European long/short equity funds returned 2.79% in the month.

Funds in North America saw their total assets rise to a new record of $1.45 trillion in February, demonstrating the absolute weighting that the region has over the global hedge fund industry. The region’s hedge funds saw inflows of $6.9 billion during the period, and managed to grow by $5.7 billion in performance.

Small fund managers continue to suffer
The hedge fund industry appears to be in a period of crowding out smaller managers despite the ever-increasing total asset size of the industry. According to the Eurekahedge report there is a growing preference to put money in the hands of large hedge funds, which it defines as those with more than $1 billion in assets.

For the small manager the challenge is currently to build up enough momentum to reach that size, or risk becoming irrelevant as institutional investors like pension funds put them on their “no fly” list.

The entire hedge fund industry has managed to capture $172.2 billion in new assets since January 2013 according to the report. In the same period hedge funds with a market cap of less than $500 million have actually seen outflows of $16.1 billion.

February gave some respite to those funds, however. In the month hedge funds of all sizes saw net inflows of assets. It was the first time in seven months that every category saw inflows.

Overall February was a good, if not notable, month for hedge funds. Trends that have been apparent for some time continued in the month, and some of them are likely to set the tone for some time to come, at least according to the Eureka Hedge analysis.