European hedge fund assets jumped by 50 per cent last year despite expectations that lacklustre returns would slow the flow of money going into the industry, a survey revealed.
At the end of 2004, European hedge funds controlled $256 billion of the $1 trillion estimated to be invested in the industry globally, up from $168 billion at end of 2003, according to the research done by trade publication EuroHedge.
More than half of the new money was invested in the first half of 2004, continuing the surge of assets flowing into hedge funds from 2003.
According to industry estimates, hedge funds returned around 9 per cent in average in 2004 - below the return from many stock markets and below the 15 per cent the funds made in 2003.
But analysts say lower returns will not put off institutions looking for diversification away from traditional stock and bond markets after the 2000 equity market crash.
Most of the new money in the industry since then has come from institutions attracted by the absolute returns as opposed to relative returns based on benchmark stock market indexes that hedge funds offer and which help keep their capital intact.
European long/short, where hedge funds can buy stocks they think are cheap and sell short, betting on a lower price in the future, remained the most popular strategy, accounting for $59.9 billion in January 2005 from $43.4 billion a year ago.
Fixed-income strategies continue to show faster growth, with assets more than doubling over the year, boosted by the rapid emergence of funds focusing on credit.
Credit funds were managing $14 billion in January from below $5 billion in January 2004, Eurohedge'ssurvey showed.