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Hedge Fund Research: Emerging markets top performer in Q3

Event-Driven and Equity Hedge strategies were the top asset gatherers in Q3 but the emerging markets sector was the best performer, up 10 per cent.

New fund flows into hedge funds slowed to USD 9.4 billion in the third quarter, down from USD 10.9 billion in the second quarter and USD 16.9 billion in the third quarter 2004, according to data released yesterday by Hedge Fund Research (HFR), the provider of hedge fund information and performance data.

At the same time, average third quarter returns jumped to 5.38 per cent, up from 1.12 per cent in the previous quarter.  This compared to returns of 3.61 per cent for the Standard & Poor's 500 and 6.58 per cent for the MSCI World during the same period. For the year, the HFRI Composite Index, an average of overall hedge performance, is up 7.36 per cent.  Total industry assets stood at USD 1.1 trillion as of 30 September 2005.

Joshua Rosenberg, president of HFR, said: "It's no secret that hedge fund returns have been mixed for the first half of the year, and that has almost certainly kept some investors on the sidelines. This caution is reflected in the continued decline in asset flows which we've seen now for three consecutive quarters. Recent returns have picked up, however, and some hedge fund managers believe that market volatility is returning as well. Both factors should draw increased investor interest to the sector going forward."

Highlights of HFR's Q3 data include:

• Emerging Markets was the top performer, up 10 per cent on the quarter and nearly 16 per cent year-to-date.
• Sector funds were up 6.75 per cent for the period, led by Energy, which climbed 14.78 per cent.
• Equity Hedge remained the single largest category with just under USD 320 billion in assets.  The strategy returned 6.11 per cent in the third quarter, and collected USD 1.9 billion in new fund flows.
• Macro funds, another major category, returned 3.57 per cent in the quarter and pulled in USD 944 million.
• Event-Driven was up 4.28 per cent for the period, and attracted USD 2.5 billion in new assets.  Year-to-date, Event Driven continued to be the most popular strategy with investors, attracting a total of USD 10.9 billion in new assets.
• Funds of funds (FOFs) saw an outflow of more than USD 1.2 billion in assets in the third quarter.  This compared to inflows of USD 3.5 billion in 2Q, and USD 6.2 billion in the third quarter of 2004.

Other data of interest from the HFR quarterly report:

• All strategies tracked by HFR posted positive returns in the quarter and the year to date, with the exception of Convertible Arbitrage which continued to post negative returns through the nine-month period.  
• Energy funds took in slightly more than USD 1 billion in new flows for the third quarter in a row, bringing total assets in the strategy to USD 10 billion.  Year-to-date the sector is up 25.74 per cent.
• Convertible Arbitrage funds continued to lose assets, albeit at a slower rate.  Outflows for the strategy in the third quarter were -USD 725 million, down significantly from -USD 4.2 billion in Q2.   Total assets in the strategy now stand at USD 38.3 billion, down from a peak of USD 48.5 billion in the second quarter of 2004.  
• Within the Emerging Markets category, Eastern Europe/CIS performance was 23.68% for the quarter and 39.67 per cent year-to-date.  Latin America posted returns of 6.41 per cent and 13.68 per cent for the respective periods.

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