CHICAGO (HedgeWorld.com)–Buoyed by the biggest single-quarter asset expansion Hedge Fund Research Inc. has ever recorded, the size of the hedge fund industry grew to US$972.6 billion in 2004, and should easily surpass the US$1 trillion mark this year, according to HFR’s year-end analysis.

The massive fourth-quarter asset gain–which included US$52 billion courtesy of fund performance and another US$26.9 billion in new assets–closed out on a high note what had been a lackluster year. In fact, of the US$73.6 billion that flowed into hedge funds in 2004, 36% came in the fourth quarter, according to HFR’s analysis. And of the industry’s overall 9.1% performance figure, the fourth quarter was responsible for a 5.3% return.

Overall, the hedge fund industry grew by US$148 billion in 2004, including performance and new assets, according to HFR. That amounted to an expansion of just over 18%. While that was nowhere near the pace of expansion in 2003, which saw 31% total growth inclusive of new assets and returns, it was respectable given that 2004′s performance was 10.5 percentage points lower than that of 2003.

Joshua Rosenberg, president of HFR, said in a statement that apart from the growth seen in 2004, the year also was notable for the emergence of multi-strategy funds. “At a time when diversification is increasingly sought by investors, it is not surprising that relative value arbitrage and event-driven funds, which employ a greater range of investing tools than typical single-strategy focused funds, collectively attracted nearly US$22 billion in new money in 2004,” he said in a statement.

Event-driven funds grew by 28% in 2004, according to HFR’s analysis. The sector attracted roughly US$10 billion in new capital and returned 13.7%.

Distressed securities did even better in terms of performance, returning 18.7% in 2004, according to the HFRI Monthly Performance Indexes, and attracting US$6.6 billion in new capital.

Emerging markets funds topped all sectors in terms of performance, earning 19.2%. Returns were driven by China- and Eastern European-focused funds, which according to HFR were up more than 31% annualized in 2004.

Other findings of the analysis included:

  • Relative value attracted US$11.3 billion in new capital in 2004 and earned a 5.4% return. With US$121.5 billion in assets, HFR estimates it is the third-largest hedge fund sector after equity hedge (US$285.9 billion) and event-driven (US$128.6 billion).
  • Equity hedge attracted US$19.1 billion in new capital and returned 7.7% in 2004.
  • Funds of funds expanded by 22% overall in 2004, but analysis by HFR indicates the category may have reached a plateau of around 36% of total hedge fund industry capital–roughly US$358.6 billion.
  • Macro funds saw inflows of only US$5.4 billion in 2004, well below the US$28.5 billion they attracted in 2003. The funds earned 4.5% in 2004.
  • Merger arbitrage and market timing funds both lost assets. Merger arbitrage saw modest outflows of capital and returned negative 1% for the year, according to HFR. Market-timing funds’ 4.7% performance could not overcome significant outflows.

CClair@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.