Despite lacklustre performance across many strategies, hedge funds had good inflows, ending 2011 with total AUM of $1.71 trillion. Fixed income was the best performer and equity long/short the worst.

Poor performance, positive flows
Hedge funds had their second worst year on record, with the Eurekahedge Hedge Fund Index returns for December a negative 0.27%, taking the year’s returns to a negative 4.22%. Asset flows in 2011 reached $51 billion, taking total industry assets to $1.71 trillion.

Five hundred funds were up more than 10% for the year, with large hedge funds outperforming smaller hedge funds by 7.5%. Launch activity was strong with more than 1,100 funds starting business in 2011, the second-highest number of launches on record.

Funds of hedge funds also had a bad year. Returns for the Eurekahedge Fund of Funds Index were down 5.59% for the year, having posted negative returns in December. Equity long/short was the worst performing strategy in the index during 2011. Returns were down 0.76% in December taking yearly performance to a negative 7.51%.

CTAs attract assets
Arbitrage strategies were one of the best performers in 2011, up 0.77% for the year after a positive December performance of 0.21%. This placed the strategy just behind fixed income, which was the best performer in 2011.

CTA/managed futures attracted the most money from investors in 2011, gaining $19 billion in net positive asset flows. However, the strategy had its first yearly loss on record in 2011, finishing the year with negative returns of 2.99% making it one of the worst performing strategies.

Distressed debt hedge funds, meanwhile, had the best returns in the last quarter of 2011, up 3.05%. However, on a total year basis returns were a negative 2.59%.

Record assets
Relative value hedge funds had the largest year-on-year increase in assets under management during 2011, increasing by almost 20% for the year. The strategy had a small positive performance in December, with returns of 0.17% but for the full year returns were down 0.57%, compared with 11.41% in 2010.

Global macro hedge funds also had a good year, with assets reaching a historical high of $127 billion. Performance, however, suffered and returns fell 0.13% for December and were down 1.82% for the year.

The Eurekahedge Multi Strategy Hedge Fund Index also fell in December (down 0.21%) while returns for the year were a negative 2.48%.

Fixed income flourishes
Fixed income was the best performing strategy for 2011, up 1.24% with positive returns in December when many others were down. It gained 0.39% in the month. Bond market volatility provided opportunities for some fixed income arbitrage managers.

Returns for fixed income relative value were more predictable compared with other strategies despite a challenging market in 2011. Volatility and curve movements are expected to continue in 2012, which will make fixed income arbitrage more attractive.

Event driven did not fare so well in 2011. Returns for the year were a negative 4.71% and December recorded a fall of 0.47%. This compares with a high positive return of 15.33% in 2010.