The hedge fund industry attracted USD 42.1 billion in new money in 2Q 2006, bringing total industry assets under management to USD 1.225 trillion, according to data released today by Hedge Fund Research, Inc. (HFR).

This was the biggest quarterly jump in new fund flows since HFR began tracking quarterly flow data in 2003.

Performance for the period was nearly flat, with the HFRI Composite Index up just 0.17 per cent compared to 5.98 per cent in Q1. On the year, the HFRI Composite Index was up 6.16 per cent, compared to 2.71 per cent for the Standard & Poor's 500 and 4.95 per cent for the MSCI World Index.

Among the largest strategies, Short Selling was the return leader, up 4.17 per cent for the quarter and 2.30 per cent for the year. This was followed by Distressed Securities which climbed 2.81 per cent in the quarter and 8.22 per cent for the year.

Equity Non-Hedge saw the largest declines, down 2.94 per cent for the quarter.  For the year, however, returns for the strategy remained positive, up 5.07 per cent. Despite losing 0.47 percent in Q2, the Emerging Market (Total) strategy continued to post strong gains of 9.65 per cent through the first half of the year.  Funds of Funds saw a loss of 0.76 per cent in Q2, and were up 4.19 per cent for the year.

'As the data shows, this was an extremely impressive quarter for hedge funds from an asset flow perspective,' says Joshua Rosenberg, president of HFR.  'Nearly all strategies saw positive flows as investors continued to demonstrate their confidence in the industry.'

Equity Hedge was the single biggest asset gainer, collecting just over USD 13 billion in new money in Q2. This was followed by Macro, with USD 8.4 billion and Event-Driven, with USD 4.8 billion. Fixed Income: Arbitrage saw the biggest outflows, losing USD 164 million in assets for the period. Asset flows into Funds of Funds jumped to USD 15.6 billion, up from USD 6.4 billion in Q1.

'We have seen historically that flows tend to follow performance, and the first quarter of 2006, along with the first part of the second quarter, was one of the strongest the industry has experienced for several years,' Rosenberg adds.

Other data of interest from the HFR quarterly report:

  • In a reversal from the previous quarter, Emerging Markets strategies posted largely negative returns in Q2, with Asia falling 1.95 per cent, Global down 0.54 per cent, and Latin America down 0.39 per cent. Only Eastern Europe/CIS was up, climbing 2.07 per cent for the period.
  • Merger Arbitrage was up 2.09 per cent on the quarter and up 8.59 per cent on the year. Merger Arbitrage saw a substantial jump in flows as well, attracting USD 3.6 billion in new money in 2Q, up from USD 254 million in Q1.
  • Technology experienced a sharp reversal in 2Q performance, falling 3.47 per cent after posting positive returns of 8.82 percent in 1Q. For the year, the strategy is up 5.04 per cent.
  • Convertible Arbitrage continued to see a rebound in interest, attracting USD 3.3 billion in new flows following a loss of USD 1.9 billion in assets in Q1. For the year, returns for the strategy are up 6.29 per cent.

Background note: HFR data is based on the more than 9,500 funds tracked historically by the firm which includes the over 5,800 funds reporting to the company as part of the HFR Database subscription product.


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