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Hedge funds see USD5.9bn outflows in April, but CTA assets continue to soar

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Hedge funds suffered an estimated capital outflow of USD5.9bn in April, the first since the industry saw outflows of USD2bn in December 2005 and the largest since USD6.1bn in October 2001,

Hedge funds suffered an estimated capital outflow of USD5.9bn in April, the first since the industry saw outflows of USD2bn in December 2005 and the largest since USD6.1bn in October 2001, according to TrimTabs Investment Research and BarclayHedge. The industry received inflows estimated at USD22bn in March.

‘April’s outflow from hedge funds was not surprising because hedge funds underperformed the S&P 500 in both March and April,’ says BarclayHedge chief executive Sol Waksman. ‘Market volatility and weak inflows into funds of hedge funds suggest hedge fund flows were also depressed in May.’

Single-manager hedge funds suffered direct outflows of USD9.4bn in April, according to TrimTabs and BarclayHedge, while funds of hedge funds took in USD3.5bn. However, an exception to the trend was commodity trading advisors, which took in USD2.2bn, the largest inflow since January 2000.

‘April’s outflow shows that hedge funds are not immune to the impact of market sell-offs,’ says TrimTabs chief operating officer Conrad Gann. ‘Yet investors pumped USD5.3bn – 7.3 per cent of assets – into CTAs in the first four months of 2008. The growing popularity of commodity-oriented exchange-traded funds and CTAs could be responsible for the steady rise in commodity prices.’

Seven out of 14 hedge fund strategies analysed posted outflows in April. Equity long/short saw a record outflow of USD6.2bn, equivalent to 2.9 per cent of the strategy’s assets, while equity long-bias funds lost USD1.9bn, or 1.2 per cent of assets. Both strategies performed poorly in the first four months of 2008, losing 3.1 per cent and 1.4 per cent respectively.

The only strategies posting significant inflows in April were distressed securities, which received USD2.6bn, boosting assets by 1.8 per cent, and event-driven, which received USD2.1bn (1.4 per cent of assets). Those two strategies were by far the largest asset gatherers in the first four months of 2008, reflecting the bearishness of investors, TrimTabs and BarclayHedge say.

For the seventh consecutive month, merger arbitrage posted an outflow, seeing net redemptions totalling USD641m, or 2.2 per cent of assets. Between October last year and April, merger arbitrage lost no less than USD9.2bn, a quarter of the strategy’s total assets. In addition, equity long/short, equity market neutral, convertible arbitrage and (fractionally) equity long-only funds have all experienced net outflows for the year to date.

TrimTabs and BarclayHedge believe the cancellation of several high-profile deals in late 2007 and early 2008 led investors to believe that merger arbitrage was no longer a promising strategy. However, they say, it was in fact the most profitable strategy in the first four months of 2008, delivering a return of 2.5 per cent.

The returns of all 14 strategies were below their historical averages over the first four months of the year. For example, fixed income, which has delivered an average annual return of 6.4 per cent since January 2000, lost an annualised 17.4 per cent during the four-month period. Relative underperformance was greater among funds of hedge funds (15.9 per cent) than among single-manager hedge funds (11.9 per cent).

The report also notes that very large funds with more than USD5bn in assets weathered the market slump relatively well, adding 4.5 per cent in assets in the first four months of the year, while very small funds with less than USD200m saw net outflows of 3.9 per cent over the same period.

TrimTabs and BarclayHedge point out that the largest funds delivered strong relative performance in part because many of them follow multistrategy and emerging market investment, which have fared relatively well this year, while equity long/short, equity long-bias and fixed-income strategies are over-represented among very small funds.

The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis. Founded by Charles Biderman in 1990, TrimTabs Investment Research publishes daily coverage of US stock market liquidity, including mutual fund and ETF flows, as well as weekly withheld income and employment tax collections.

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