The hedge fund industry continued its recovery from the financial crisis of 2008 by posting the strongest gains since 1999, according to Hedge Fund Research, Inc., the hedge fund industry data provider. The recovery in performance helped event-driven, macro and Asian funds see strong inflows.

The HFRI Fund Weighted Composite Index gained 20.1% in 2009, just one year after posting the worst calendar year loss in the history of the industry. Investors allocated $13.8 billion of new capital to the industry in the fourth quarter of 2009, the largest quarterly inflow since the first quarter of 2008. The quarterly increase had only a modest impact on full year capital flows, with investors withdrawing $131 billion overall in 2009. Strong performance more than compensated for investor redemptions, increasing overall global hedge fund assets to end the year at $1.6 trillion, nearly $260 billion higher than the asset trough in the first quarter of 2009, but still $330 billion below the peak of $1.93 trillion set in the second quarter of 2008. Inclusive of 2009 gains, the HFRI Fund Weighted Composite Index still remains 4.5% below the peak performance level set in October 2007. Not all funds have shared equally in the recovery; approximately 2,000 funds have liquidated since the inception of the financial crisis, while just over half of all funds have returned to their respective high watermark levels in 2009. In contrast to the third quarter of 2009, investors primarily allocated new capital into larger funds, with firms with more than $5 billion in assets under management experiencing a net inflow of over $7.5 billion.

Despite the diversified nature of the performance recovery, investors exhibited clear strategy allocations preferences in the fourth quarter. More than half of the capital inflow was invested into Event Driven strategies, suggesting that investors are positioning for continued opportunities in the credit, high yield and corporate transactions marketplace. Although the HFRI Macro Index posted a muted gain of only 4.1% in 2009, investors allocated $4.5 billion of new capital to this sector, while more than $1 billion of capital was directed into funds focusing on Asia.As regulators globally focus efforts on the hedge fund industry, private markets have already evolved offerings to meet new investor demands. In contrast to the two-and-twenty model, average management and incentive fees are now 1.6% and 19.2%, respectively. Many funds that historically have required investors to lock up capital now offer products with no lock up, while others have offered products with lower fees or hurdle rates in consideration for capital or term commitments. While standards such as UCITS III have achieved wide and growing acceptance, nearly all funds are now open to transparent fund investment; transparency has become the institutional standard.

In many respects, hedge fund performance in 2009 suggests an aggressive return of risk – essentially the reverse of the financial crisis of 2008 – but this generalization masks a significant evolution of the industry which has occurred. Many of the fund strategies that were most out of favour in 2008 became top performers in 2009. At the same time, funds have responded to investor demands by offering more specialized exposures, modified terms and greater transparency than pre-2008.