Total hedge fund asset levels increased by 8 per cent in the second quarter of this year to USD2.593trn, from USD2.401trn at the end of March, according to the latest HFN Hedge Fund Industry Asset Flow Report detailing total assets and asset flows across strategies, sectors, regions and asset classes in which hedge funds operate.
New assets allocated to the industry were estimated at USD107.3bn in the second quarter, according to the survey by HedgeFund.Net, part of the Channel Capital group, while performance gains accounted for an additional USD89.6bn, the second largest gains on record. In the first six months of 2007, hedge funds assets rose by 20.4 per cent, including USD268bn in new allocations.
According to HFN, long/short equity assets increased by 7.7 per cent to an USD766.5bn. 'The broadest of all hedge fund strategies, long/short equity funds rode the rise in global equity markets during the first half of 2007, bringing in an USD15.3bn in new allocations in the second quarter.
'However, the majority of the total asset level rise came from fund performance which added an additional USD39.3bn, the second largest increase on record. In the first half of 2007 long/short equity funds attracted USD48bn in new allocations.'
The survey says asset growth for fixed income-focused funds slowed in the second quarter as liquidations increased and performance lagged. After increasing by the fastest rate on record in the first three months of 2007, total asset growth in fixed income funds slowed to 5.5 per cent, with assets reaching USD468.5bn including USD23.2bn in new allocations in the second quarter.
As a result of difficulties in credit markets stemming from losses tied to sub-prime mortgage lending practices, HFN says, fixed income funds experienced near-record liquidations of USD3.9bn in the quarter, while performance gains added USD5.4bn, its smallest quarterly contribution to asset growth since 2005.
By contrast, emerging markets attracted near-record allocations in the three months to June, 'despite rumblings that the space was becoming crowded. Total assets in emerging market funds increased by 14.2 per cent to USD279.3bn, including USD20.9bn in new allocations, the second highest quarter on record and the fourth consecutive quarter of double-digit growth. In the first half of the year, emerging market funds attracted USD38.2bn in new allocations.'
Emerging market equities have been the best performing specialisation within the hedge funds industry in recent quarters, the report says, reflected in consistent increases in new allocations. A record USD5.4bn in new allocations in the second quarter, along with strong performance, boosted total assets by 13.7 per cent to USD95.2bn. Total assets in emerging market debt-focused funds rose by 9.5 per cent, the second fastest rate on record, to USD75.7bn including USD4.8bn in new assets.
Global macro fund assets reached USD131.8bn in the second quarter, with allocations reaching their highest level in a year after disappointing performance in 2006 and a net outflow following redemptions in the first quarter. Total assets increased by 9.6 per cent, including USD6.9bn in new assets.
The growth of multi-strategy funds shows no signs of slowing, according to HFN, with large institutional investors increasingly viewing them as a viable reduced-fee diversification alternative to fund of funds. As a result, the three months to June was the third consecutive quarter of double-digit growth, including USD22.8bn in new allocations, which brought total assets to USD321.9bn, an increase of 10.5 per cent from the end of March.
Distressed funds, which have produced steady returns recently while remaining relatively uncorrelated to broad equity markets assets, rose by 10.8 per cent in the second quarter. The survey says consistency of returns and lock of correlation helped distressed funds achieve a third consecutive quarter of double-digit growth, attracting USD9.54bn in new allocations. Total assets reached USD191.7bn, an increase of 10.8 per cent over the first quarter, after distressed funds attracted USD34.2bn in new allocations in the first six months of 2007.
HFN says that after poor performance in 2006 spilled over into the first quarter of this year, Japan-focused funds again had the highest proportion of redemptions for any fund category, with total assets dropping 20.5 per cent to USD37.9bn following an outflow of USD9.8bn.
Total assets in funds with a global investment focus increased by 8.92 per cent to USD1.276trn, including USD57.5bn in new assets. Total assets in funds investing in European markets increased by 7.6 per cent to USD403.2bn, including USD14.6bn in new assets.
Funds investing in US markets saw assets also increase by 7.6 per cent to USD699.4bn, including USD40bn in new allocations. Assets in funds investing primarily in Latin America increased by 17.4 per cent to USD11.8bn. In the first half of this year, assets in Latin America-focused funds have risen by an estimated 73.2 per cent as the region continues to produce strong returns.
Total fund of fund assets, which are not double-counted in the total industry figure, increased by 9.4 per cent to an estimated USD1.250trn including USD74.5bn in new assets, the largest quarterly new allocation on record.