Hedge funds expected to set new record for assets in 2011

Hedge funds around the world are expected to attract $210 billion in new money this year, helping to set a fresh record for assets, according to a survey by Deutsche Bank.

The increase of new money, roughly four times the amount added last year, plus performance is expected to increase industry assets to $2.25 trillion by the end of the year, data from the bank's ninth annual alternative investment survey shows.

Hedge Fund Research, a Chicago based performance and asset tracking group, said the loosely regulated industry oversaw $1.92 trillion in assets at the end of 2010. Indeed, hedge fund assets reached an all time high of $1.93 trillion in 2008 before the financial crisis took hold.

Fresh interest in hedge funds comes at a time pension funds and other large investors are trying to boost their returns but it also comes as the industry faces fresh scrutiny due to the US government's wide ranging, high profile insider trading probe.

The bulk of the new money is expected to come from institutional investors, the bank wrote, noting that 83% of sovereign wealth funds and 83% of pension funds raised their allocations to hedge funds last year.

These types of investors are readying themselves for new investments by beefing up their own teams while also turning more to consultants for help in selecting managers.

While tastes for hedge funds has historically favoured the industry's biggest players, the bank's survey found that investors are now ready to give smaller players a try with 65% of the investors, saying they expect to put money with funds that have less $1 billion in assets.

Hedge fund managers delivered gains for a second straight month in February, according to data released, but the asset class still lagged the broader stock market.

The average hedge fund returned 1.39% last month, according to the Hennessee Group while the Standard & Poor's 500 index advanced 3.2% and the Dow Jones Industrial Average increased 2.81%.

Rival research group Hedge Fund Research said the average hedge fund gained 1.21% during the month. And in the first two months of 2011, hedge funds climbed 2.08%, lagging the Standard & Poor's 5.53% rise. In January, the average hedge fund inched up 0.65%.

Hedge funds often promise to make clients money in all markets by relying on methods like shorting stocks that are more restricted at mutual funds.

‘Managers benefited from modest net long exposure, but overweight exposure to cyclicals, shorts and hedges detracted from performance,’ said Charles Gradante, a co-founder of Hennessee Group, New York based investors with hedge funds which also tracks performance and flows.

In February, the outlook on US stocks began to cloud for many hedge fund managers, according to a report from TrimTabs/BarclayHedge. It said that 40% of surveyed managers were bearish on the S&P 500. In January only 26% of polled managers were bearish.

February's trading was influenced by political unrest in the Middle East and northern Africa, which helped push oil prices higher. At the same time though, the US economy appeared to get a shot in the arm as more jobs were created, suggesting the recovery may accelerate.

Hedge funds focusing on Russia and Eastern Europe gained 3.26%, among the best returns in the industry, while so called short sellers, hedge funds that bet exclusively that stock prices will fall, dropped 5.19%, HFR reported.