Investors who remained invested in hedge funds through the financial crisis are by and large very pleased with how they have performed, and many who pulled their money out are now returning said Gottschalk, whose Swiss-based company manages almost $9 billion in funds of hedge funds.
"There has been a clear change of attitude towards hedge funds between 2009 and now. Many institutions say they will up allocations, and private investors who stayed on the sidelines for much of 2009 are now coming back," Gottschalk told Reuters.
By October 2009, hedge fund assets had slumped 38 percent from their $2.7 trillion peak reached in the first half of 2008, but some analysts say inflows are now picking up, and assets could soon be back close to their peak.
Hedge funds lost an average 20 percent in 2008 as markets slumped. Many funds were forced to liquidate positions at unfavourable prices when investors asked to pull their money out, and in 2009 many of those investors remained in cash.
However, many funds have now recouped those losses, whereas equities are still well below their market peak in spite of the strong run up last year, Gottschalk said.
He said funds of hedge funds were among the first investors to start reinvesting their cash in hedge funds. "Early last year many funds of funds were holding a large proportion of their portfolio in cash in order to deal with client redemption requests from the end of 2008," he said. "In the second half of the year they redeployed the cash that was left, which accounted for a large component of the inflows to hedge funds in that period."
2010 NOT AS GOOD AS 2009:
Going into 2010 there has been an uptick in institutional research into hedge funds, expected to translate into a healthy growth in demand, with many institutional investors looking to invest, mainly via fund of funds, for the first time. Even so, Gottschalk said, funds which did not perform well in 2009 will find it hard to attract assets, and many have already closed. But that has left the industry leaner, and means inflows are allocated among fewer funds, leaving more for each of them.
This year Gottschalk said individual investors and private banks were likely to focus on the more liquid hedge fund strategies while institutions were likely to diversify across all strategies.
"Some of the less liquid strategies like relative value and convertible arbitrage did extremely well in 2009 and the environment seems good for 2010. These strategies will likely attract institutional investors," Gottschalk said.
"Overall, I don't believe hedge fund performance will be as good as 2009, an exceptional year, but prospects are still above average in terms of performance expectations," he said.