5  Not included in these figures are significant pools of capital held in privately managed accounts run by hedge fund managers as well as capital managed by the proprietary desks of global investment banks. Though typically not formally structured around hedge fund vehicles, these assets closely mirror the investment activities of hedge funds. BIS Review 8/2005  1  Until the second half of the nineties, the hedge fund industry capital base was largely one of high net worth fortunes. Part of the acceleration of inflows throughout the second half of the nineties can be attributed to pension funds, endowments and other institutional investors who have begun to allocate small percentages of their asset base to hedge funds. More recently, funds of funds have become an important source of new inflows to the industry. The largest share of the industry’s total client base continues to be private wealthy individuals either as direct investors or through funds of funds. Industry flows data suggest, however, that assets from institutional investors have recently grown more rapidly than the overall industry asset base. A major factor contributing to the flows of new money into hedge funds has been the high relative rates of return (graph 2). The average return on the CSFB/Tremont hedge fund index over the past 10 years is 11%. Dividing the excess return over cash by the realized return volatility, hedge funds achieved a Sharpe ratio of 0.8.
of Hedge Funds  Assets under Management  Source: HFRI Graph 2 All Hedge Fund Assets Flows and Returns 50'000  50%  40'000  40%  30'000  30%  20'000  20%  10'000  10%  0  0%  -10'000  -10%  -20'000  -20%  -30'000  -30%  -40'000  -40%  -50'000  -50%  Mar-94  Mar-95  Mar-96  Asset Flows (LHS)  Mar-97  Mar-98  Mar-99  Mar-00  MSCI World $ Return (YoY, RHS)  Mar-01  Mar-02  Mar-03  Mar-04  All Hedge Funds Return (YoY,RHS)  Source: CSFB-Tremont  6  BIS Review 8/2005  Graph 3 Crude Oil Price and Futures Contract Volume (NYMEX)  60  300'000  50  250'000  40  200'000  30  150'000  20  100'000  10  50'000  0  0  1996  1997  1998  1999  2000  2001  Non-Commercial Long Contracts (rhs) WTI Crude Oil $ Barrel) (lhs)  2002  2003  2004  2005  Non-Commercial Short Contracts (rhs)  Graph 4 Gold Price and Futures Contract Volume (CMX)  300'000  550  250'000  500  200'000  450  150'000  400  100'000  350  50'000  300  0  250  1996  1997  1998  1999  2000  Non-Commercial Long Contracts (lhs) Gold Spot $ Ounce) (rhs)  BIS Review 8/2005  2001  2002  2003  2004  2005  Non-Commercial Short Contracts (lhs)  7