Investors Allocated only $16.4 Billion to Hedge Funds in Q1 2008

The expansion of third party hedge fund administration is moving at a remarkable pace. With the hedge fund industry undergoing seismic shifts, however, administrators are faced with a formidable set of business and operational challenges, according to a new report, Trends in Hedge Fund Administration 2008 from Celent, a Boston-based financial research and consulting firm.

According to the report, in 2007, hedge funds saw record capital inflows of $194.5 billion, according to data released by Hedge Fund Research (HFR). This represents a 54% increase from year to year ($126.5 billion in 2006) and leaves the industry managing $1.87 trillion as of year-end 2007. In Q1 2008, hedge fund inflows slowed to a trickle. Consistent with the theme of lower risk appetite due to credit and equity market weakness, investors allocated a mere $16.4 billion to hedge funds. The 0.38% increase in capital represents the smallest increase since the second quarter of 2004, and brings total industry assets to $1.875 trillion. High net worth individuals still make up approximately 54% of the total hedge fund industry, but future flows are expected to be significantly institution-heavy. Celent estimates that endowments and foundations currently account for 40% of institutional hedge fund capital, while pension plans, which control significantly more in assets, account for 50%. Pension funds will account for 65% of cumulative hedge fund net inflow until 2010.

To date, approximately 65% of hedge fund industry assets are in funds of hedge funds. Whereas the trend of spreading risk across many managers is slightly regressive, funds of funds will still make up an estimated 60% of hedge fund AUM by 2012. And while AUA growth from November 2007 to April 2008 (9%) has slowed in comparison to growth over the same period in 2006/2007 (17%), the trajectory is nevertheless impressive given severe and ongoing financial market distress. The resoluteness of the administration market shows that the outsourcing trend in the hedge fund industry is driven by structural factors which defy cyclical weaknesses.

For more of the reports findings check the Celent website at https://www.celent.com.