This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Hedge Funds Adapt to New Climate

NEW YORK ( TheStreet) -- For decades, hedge funds focused on serving wealthy individuals. But since the financial crisis, many individuals have fled hedge funds. Now most assets flowing into the funds are coming from pensions and other big institutions. As a result, the shape of the hedge fund business is changing. Big funds favored by institutions are prospering, while many smaller funds are struggling to survive.

The exodus of individuals has been a special blow to vehicles known as funds of hedge funds. These take money from investors and put it into 20 or more hedge funds. In 2007, funds of funds had $798 billion in assets, or 42% of all money in hedge funds, according to Hedge Fund Research. Then during the next two years, investors withdrew $159 billion in assets. Today funds of funds have $672 billion in assets and account for 33% of hedge fund assets.

"The wealthy individuals who invested in funds of funds are still frightened," says Nadia Papagiannis, a Morningstar analyst who follows alternative investments.

Individuals had long favored funds of funds because the vehicles seemed to offer diversification and the safety that comes from professional managers who can pick sound investments. But in 2008, funds of funds lost 20%, according to Hedgefund.net. The losses were particularly unnerving because some funds of funds had been invested with Bernard Madoff and were wiped out in the Ponzi scandal.

While many individuals have decided that hedge funds are risky, institutional investors found that top hedge funds provided important diversification during the downturn. By selling short and using other techniques, the best performers recorded small losses or actually made money. Many of the star funds are only available to institutions that can invest large amounts.

"Institutions want diversification, and they are increasing their allocations to hedge funds," says Amy Bensted, manager of hedge fund data for Preqin, which tracks alternative investments.

Preqin says that public pension funds now have 7% of their assets in hedge funds, up from 4% in 2007. Many endowments of colleges and other institutions have reported putting more than 20% of assets into hedge funds. According to Preqin, institutions now account for 61% of hedge fund assets, up from 45% in 2008. As result of the inflows from institutions, total assets of hedge funds topped $2 trillion this year, up from $1.9 trillion in 2007.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $123.25 0.00%
FB $83.30 0.00%
GOOG $548.34 0.00%
TSLA $185.00 0.00%
YHOO $45.10 0.00%

Markets

DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs