Hedge funds, the lightly-regulated investments open to those who can meet the high price of entry, appear to be surging in popularity again. The third quarter of 2010 saw the largest-ever quarterly increase of $149 billion in assets, according to Hedge Fund Research (HFR), which tracks and analyzes the funds. Globally, assets grew to $1.917 trillion in 2010, coming close to the peak of $1.93 trillion in the second quarter of 2008.
In my last blog post, I wrote about where the rich intend to invest this year, based on a survey by Institute for Private Investments. After long-only global equities, the second most popular investment choice (38 percent of the 72 respondents) is hedge funds.
There are a variety of strategies hedge funds employ, but typically they are broader than the long-only funds, and can include derivatives, short-selling and commodities, in addition to both long and short positions. Investment management fees are usually high, but because they have more investment variety, they can be riskier than traditional funds, while delivering potentially higher returns.
There were some challenges for hedge funds earlier in 2010, including fears of a sovereign debt crisis in Europe. In an interview on CNBC, HFR president Ken Heinz said the average gain for hedge funds was 10.4 percent in 2010, approximately the same as equity-only funds, with most of the improvement coming late in the year. He cited an increase in investor risk-tolerance for the current popularity of hedge fund investing.
Brent Fykes, senior investment partner at multifamily office GenSpring, took the same position in my previous blog when he noted that wealthy investors are taking some of the cash they had sidelined and putting it to work globally in emerging markets and in hedge funds. When the broader stock market starts going up, he said, "the wealthier start to become more return-seeking and take on more risk. People, by nature, become more risk-taking when the economy improves."
How about you: Are you willing to put some money in riskier investments this year?
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