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Hedge fund asset flows went into reverse in third quarter, says Lipper report

Net hedge fund industry asset flows in the third quarter reversed the trend of the previous two quarters, with a decline of USD18.6bn following a net inflow of USD4.03bn during the second quarter, according to the latest Lipper Tass Asset Flows Report.

In the first three quarters of 2008 a net USD11.96bn flowed out of the hedge fund industry, an amount three times larger than the last negative flow in December 2005. Combined with a broad hedge fund performance decline of 10.33 per cent in the third quarter, this resulted in a fall in global hedge fund assets from USD1.80trn to USD1.63trn at the end of September.

Third-quarter inflows slumped by 561 per cent or USD22.6bn from the previous quarter, after the three months from April to June reversed the previous four consecutive quarters of successively smaller inflows, according to the author of the report, global head of hedge fund research Aureliano Gentilini.

Investors favoured increasing exposure to directional strategies such as global macro, managed futures and dedicated short bias amid varying degrees of turbulence in the equity, commodity, foreign exchange and debt markets. However, these drivers were not sufficient to outweigh reductions in relative value (apart from market neutral) and event-driven strategies.

In US dollar terms positive inflows were enjoyed by global macro (USD2.89bn), managed futures (USD1.34bn), equity market neutral (USD244m) and dedicated short bias (USD124m). Combined inflows for these strategies totalled USD4.60bn, compared with USD12.04bn in the second quarter.

The largest outflows were experienced by long/short equity (USD10.98bn), fixed income arbitrage (USD3.54bn), multistrategy (USD3.28bn) and emerging markets (USD2.88bn). Outflows for these strategies totalled USD20.67bn, up from USD6.81bn in the second quarter. Of the four categories, only multistrategy funds recorded positive inflows (of USD778.46m) in the previous quarter.

As a proportion of assets at the end of September, the highest quarterly growth rates were enjoyed by dedicated short-bias (2.11 per cent), global macro (1.86 per cent) and managed futures (1.02 per cent). Fixed income arbitrage outflows amounted to 4.12 per cent of assets, while emerging markets saw outflows equivalent to 3.05 per cent and convertible arbitrage 2.89 per cent.

Overall hedge fund net outflows amounted to 1.21 per cent of industry assets at the end of September, compared with net inflows of 0.26 per cent in the second quarter and a quarterly average of 2.52 per cent since January 1994. Only five of the 10 hedge fund sub-strategies designated by Lipper Tass posted positive inflows in the third quarter.

Following a gain of 2.58 per cent in the second quarter, the Credit Suisse/Tremont Hedge Fund Index fell by 10.33 per cent, the worst quarterly performance since the index was launched, beating even the 8.87 per cent fall in the third quarter of 1998. This compares with declines of 8.37 per cent for the S&P 500 index, 15.15 per cent for the MSCI World USD total return index and 2.57 per cent for the JPMorgan GBI total return index.

All hedge fund sub-strategies measured by Lipper Tass posted declines for the third quarter, with the worst performing being emerging markets with a fall of 15.06 per cent, convertible arbitrage with 14.71 per cent and long/short equity with 12.86 per cent. By contrast, equity market neutral lost just 2.04 per cent, while event-driven risk arbitrage declined by 4.99 per cent and managed futures by 7.11 per cent.

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