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Portfolio > Alternative Investments > Hedge Funds

Hedge Funds Then and Now: 2008 vs. 2014

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The hedge fund sector has experienced quite a few changes in the six years since September 2008, when Lehman Brothers was forced to take down its shingle and the global economy shuddered.

Many of these changes are the result of efforts to win back investor confidence and meet the needs of institutions that are increasingly allocating capital to hedge funds.

On Thursday, alternatives data and intelligence provider Preqin published a summary of how the hedge fund industry has changed in the post-crisis years.

Global hedge fund assets under management have bulged to $2.9 trillion, up from $2.3 trillion in 2008.

In addition, whereas 5,165 were active globally at the end of 2008, another 5,882 funds have rolled out since then.

Before the crisis, hedge funds were invariably described in media reports as “lightly regulated.” Not anymore.

The sector now must deal with an alphabet soup of regulations — AIFMD, FACTA, the JOBS Act — and ones with boldface names attached — Dodd-Frank, Volcker Rule.

These new regulations reflect the broader efforts of policymakers, institutions and asset managers over the last six years to avoid another major economic downturn and restore stability and growth to the global economy.

Hedge fund strategies go in and out of favor. In August 2008, CTAs were riding high, with a 12-month return of 28.4%, and macro funds reported a gain of 14% over the same period.

Fast forward to August 2014. CTAs and macro funds were bringing up the rear, trailing their peers with 12-month returns of 6.5% and 5%, respectively.

In contrast, event-driven strategies were smarting from a 12-month loss of 1.2% in August 2008. Six years later, they were among the best-performing funds, up 11.5%.

Meanwhile, hedge fund managers in the post-crisis period have begun to see wisdom in reducing their fees.

The proportion of funds charging the standard “2 & 20” (2% management, 20% performance/incentive) has dropped from 28% in 2008 to 23% this year, according to Preqin.

As for investor sentiment, the story is in the numbers.

Sixty-three percent of hedge fund capital currently comes from institutional investors, compared with 45% in 2008. The total number of institutional allocators to hedge funds stands at 4,750 today, up from 3,500 six years ago.

In 2008, 35% of institutional investors thought that hedge funds had fallen short of their expectations. Twenty-eight percent think that today.

Satisfaction among a majority of institutional investors has only increased in the post-crisis years, with 72% saying hedge funds had met or exceeded their expectations, up from 62% who said this in 2008.

Institutional investors’ satisfaction likely stems from the fact that they are not chasing high performance these days. Preqin recently reported that they’re more interested in uncorrelated, risk-adjusted returns.

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