With $400 billion ‘in play’, hedge funds face challenges


The hedge funds industry faces challenges in 2012, but also a year of significant opportunity, according to a Barclays Capital report, The Money Trail, released today.

The report contains analysis based on a survey of 165 investors conducted at the firm’s recent Prime Services Hedge Fund Symposium hosted in New York, as well as one-on-one investor interviews and other industry analysis. The surveyed investors manage approximately $4 trillion in assets under management (AUM), of which approximately $500 billion is allocated to hedge funds. This represents one quarter of the hedge fund industry’s total AUM.

With an uncertain macro economic environment ahead and the recent volatility in global markets, hedge fund investors plan on making considerable changes over the coming year. However, some of these changes will present significant opportunities for hedge funds, with 56% of the surveyed investors planning to increase their hedge fund allocations over the next twelve months, more than seven times the number that plan to decrease their allocations. Endowments and foundations, private banks and public pensions are the most likely allocators of new capital to hedge funds in 2012.
“Our analysis indicates that investors are likely to allocate approximately $80 billion of new capital to the hedge fund industry this year,” said Ajay Nagpal, Head of Prime Services at Barclays Capital. “2012 has the potential to be the most significant year for new capital allocations to hedge funds since 2007.”

In addition to the approximately $80 billion of new assets, investors are likely to reallocate some $300 billion of existing hedge fund assets within and across hedge fund strategies. In total, the hedge fund industry could see between $350 billion and $400 billion of money ‘in play’ over the next twelve months – almost one fifth of the current total hedge fund industry AUM.

Of the new flows, investors plan to allocate most to global macro and systematic / volatility strategies, as they look to add more tactical and trading-oriented strategies with relatively low correlation to equities. Reallocations will be most significant within equity and credit strategies, reflecting a combination of investors’ redemptions from poor performers, their belief in mean reversion and a preference for more specialized products within these strategies.


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