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Asset Flows Slowed in Fourth Quarter: TASS

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RYE, N.Y. (–Hedge fund investing slowed down toward the end of 2004, but the industry still managed to absorb a record US$123 billion in net inflows, according to research from Tremont Capital Management Inc.’s* TASS Research division.

The fourth quarter saw the lowest net asset flow number TASS recorded all year–US$16.3 billion. That followed a US$25.1 billion figure for the third quarter, which itself was slightly more than half the record US$43.3 billion TASS measured in the second quarter. TASS’s first quarter estimate of asset inflows was US$38.2 billion.

“Growth continued last year, although the pace declined through the last half,” said Robert I. Schulman, co-chief executive of Tremont, in a statement. “The industry has attracted substantial interest over the last years as investors sought out returns non-correlated to the broad markets.”

While some may be quick to seize on the slowdown in asset flows in the second half of 2004 as evidence the hedge fund industry is cooling off as it approaches US$1 trillion in assets, there are a number of reasons to hold off on that assessment. Mr. Schulman emphasized that the growth slowdown as measured by TASS was not unexpected, given that low equity market volatility affected many funds’ performance and kept hedge fund investors “on the sidelines.”

“The fourth quarter marked a cycle of slower, yet good growth in an industry where asset flows have grown at a feverish pace,” Mr. Schulman said.

Another reason for caution among the “hedge funds are so over” crowd is that less than a month ago, Chicago-based Hedge Fund Research Inc., reported that its database showed fourth-quarter flows of US$27 billion, which along with US$52 billion in positive fund performance combined to fuel the largest single-quarter growth in hedge fund assets HFR had ever recorded.

According to the TASS data, long/short equity strategies saw the biggest inflows in 2004. Investors poured US$33 billion into such strategies, including US$4.5 billion in the fourth quarter, according to TASS.

Event-driven strategies took in US$6.6 billion in the fourth quarter, according to TASS, which brought their total inflow for the year to US$25.7 billion.

Multi-strategy funds saw US$16.7 billion in net inflows in 2004, according to TASS, including US$2.9 billion in the fourth quarter. It was not immediately clear whether TASS’s fourth quarter multi-strategy total included any of the money reportedly raised by Goldman Sachs Group Inc. alum Eric Mindich, whose Eton Park Capital Management LP, New York, took in more than US$3.5 billion in new assets after its launch.

“The fourth quarter asset inflows continued to favor strategies with broad investment latitude,” said Stephen Jupp, senior vice president and director of quantitative research at Tremont, in a statement. “It also favored the multi-strategy category which consists of managers who allocate money to more than one type of strategy. This approach appears to have gained in popularity over the year as investors seek out funds offering more flexibility than a single-strategy focus.”

TASS officials estimate the size of the hedge fund industry is now about US$975 billion, which jibes with earlier estimates from HFR (US$972.6 billion) and Hennessee Group LLC, New York (US$934 billion).

The TASS numbers are based on the TASS database, which includes roughly 3,000 active funds and another 2,100 funds that were active at some point between January 1994 and December 2004, but which have now shut down, according to TASS.

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Contact Bob Keane with questions or comments at: [email protected].


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