DRIVEN BY STRONG FOURTH QUARTER RALLY, HEDGE FUND SECTOR ENDS 2004 WITH NEARLY $1 TRILLION IN ASSETS

 $79.6 Billion Growth in Assets in Q4, includes $27 Billion in New Money, ranks as Largest Quarterly Asset Increase on Record. 

Distressed Securities and Emerging Markets categories continue to set the performance pace; Multi-Strategy categories- such as Event Driven and Relative Value Arbitrage –  gain more traction; Fund of Funds expansion plateaus; Macro takes a breather.

CHICAGO— January 26, 2005— Hedge Fund Research, Inc. (HFR), the leading source of Hedge Fund information and performance data, today released its year-end analysis for 2004 which shows that for the year hedge funds returned 8.9% to investors, attracted  $73.6 billion in net inflows, and expanded by nearly 19% to  $972.6 billion in assets under management.  Although these results are more moderate than the torrid pace seen in 2003 (19.6% performance return and 31% total growth), 2004 was notable for its rapid recovery from a mid-year slowdown and steady  performance in nearly all fund categories. According to HFR, the current trajectory makes it highly likely that that the industry will eclipse $1 trillion in Q1 2005.

In particular, the annual results were energized by an extremely strong Q4 that brought a solid finish to a year that had experienced negative to flat returns in Q2 and Q3, and tepid mid-year asset flows. The $79.6 billion expansion of assets in Q4, made possible by a solid 5.3% industry-wide quarterly performance gain along with $27 billion in inflows qualifies as the largest quarterly expansion yet seen by HFR.

“Apart from the more than $152 billion increase in assets under management from year end 2003, the big story in hedge funds in 2004 may be the growth in popularity of multi-strategy funds,” said Joshua Rosenberg, President of HFR.  “At a time when diversification is increasingly sought by investors, it is not surprising that Relative Value Arbitrage and Event Driven funds, which employ a greater range of investing tools than typical single strategy-focused funds, collectively attracted nearly $22 billion in new money in 2004.”

A close examination of the data available in the Q4 2004 HFR report, as well as data from the entire year, reveals a number of interesting trends from across the 33 distinct categories of hedge funds that HFR tracks.  Please note that all performance figures are based upon the HFRI Monthly Performance Indices.

Top Category Stories for 2004

·                          The Event Driven category, also known as “corporate life cycle” investing, which looks for opportunities created by significant transactional events, such as spin-offs, mergers and acquisitions, bankruptcy reorganizations, recapitalizations and share buybacks, grew by 28% in 2004, ending the year with $128.6 billion in assets, (second in size only to the Equity Hedge category). For the year, the sector attracted just over $10 billion in new capital and returned 14.2% to investors (catalyzed by a vigorous 7.8% return in Q4).

·                          The $46.3 billion Distressed Securities category, which makes investment in distressed firms through bank debt, corporate debt, trade claims, common stock, preferred stock or warrants, returned an impressive 18.6% for the year (including 7.7% in Q4 alone) and attracted $6.6 billion in new funds, reversing a $2 billion outflow in 2003.  Total asset size in the category grew by 30% from its year-end 2003 level of $35.5 billion.

·                          Although its return was roughly half of its 39.8% performance in 2003, the $32 billion Emerging Market category continued to set the pace in 2004, returning 19.0% to investors. Returns were largely driven by investment in China as well as Eastern European-focused funds which were up more than 32% on an annualized basis.  

·                          The multi-strategy Relative Value Arbitrage category, which attempts to take advantage of relative pricing discrepancies between instruments including equities, debt, options and futures, attracted $11.3 billion in new capital in 2004 (more than any other category except Equity Hedge). The sector, which saw a 5.3% return on investment in 2004, expanded by 23% to $121.5 billion in assets and is now the third largest hedge fund sector (after Equity Hedge and Event Driven).

·                          The mammoth $285.9 billion Equity Hedge category expanded by 18% over the course of the year, and remains by far the largest category. In 2004, the category rallied strongly in Q4 (5.4%) to return 7.4% for the year.  Combined with $19.1 billion in yearly inflows, the category maintained its relative size with respect to the remainder of the industry.

·                          Although the $358.6 billion Fund of Funds sector expanded by 22% in assets under management over the course of the year, the pace was more moderate than in prior years. In fact, data indicates that the percentage of total hedge fund assets controlled by Funds of Funds may have reached a plateau of around 36%.

·                          The $107.4 billion Macro Fund category, which is characterized by leveraged bets on anticipated price movements of global stock markets, interest rates, foreign exchange and physical commodities, picked up inflows of only $5.3 billion over the year, a steep drop off from the $28.1 billion inflow seen in 2003. On a performance basis, the category returned a lackluster 4.1% to investors.

·                          Categories that declined in size include: the $14.5 billion Merger Arbitrage sector, which through modest outflows and poor performance lost just less than 1%, and the $3.6 billion Market Timing category that lost just over 7% when large outflows were not overcome by 4.7% performance return.

# # # #

The HFR 2004 Industry Report contains more than 140 pages of charts and graphs provided in both PowerPoint and Adobe Acrobat formats.  For more information on the Report or on HFRI Indices, please visit www.hedgefundresearch.com .

About HFR

Chicago-based HFR Group L.L.C, founded in 1993, is one of the global leaders in hedge fund data, research, indexation and asset management.  The HFR Group companies include Hedge Fund Research, Inc., and HFR Asset Management L.L.C.  Hedge Fund Research produces HFR Database, considered to be the definitive source of hedge fund performance and information.  HFR distributes the HFRI and HFRX Performance Indices, considered to be the premier benchmarks for the hedge fund industry.  With more than $3 billion in assets under management, HFR Asset Management offers a range of hedge fund investment products: Investable Indices, Funds of Funds, single-manager funds and customized multi-manager funds.