Hedge funds posted the fourth worst quarterly performance in industry history in Q3 2011, as a combination of uncertainty regarding the European sovereign debt crisis and weakening economic data contributed to volatility across equity, credit, commodities and currencies.
These performance declines reduced total hedge fund industry capital by USD85 billion, according to today’s release of the HFR Global Hedge Fund Industry Report: 3Q11. The asset decline ends two consecutive quarters in which total capital under management eclipsed new record levels, and brings total hedge fund industry AUM to USD1.97 trillion. The HFRI Fund Weighted Composite Index declined by 6.2 per cent for the quarter, wiping out a small 1H11 gain and bringing year to date (YTD) performance for the broad based composite to a decline 5.4 per cent.
Despite performance based declines, investors continued to allocate new capital to the hedge fund industry, with 3Q net inflows totalling USD8.7 billion. This marks the ninth consecutive quarter in which the industry has experienced net inflows from investors and brings the YTD inflow total to USD70.1 billion. Investors exhibited preferences for certain strategies, allocating USD8.5 billion of new capital to Relative Value Arbitrage funds, bringing YTD inflows in Relative Value to over USD30 billion. Macro funds experienced a net outflow of USD3 billion, despite posting a narrow performance gain of 0.6 per cent in 3Q.
However, Macro has been in favour with investors throughout 2011, with nearly USD20 billion of inflows YTD. In contrast, Equity Hedge funds, which comprise nearly thirty per cent of all industry capital, experienced USD2.7 billion in net inflows for the quarter, despite posting a performance decline of 10.4 per cent. Credit-sensitive Event Driven (ED) funds, which declined by 7.3 per cent in the quarter, experienced a net inflow of less than USD500 million; ED funds have received less than USD10 billion in new capital in the first three quarters of 2011, the lowest by strategy area.
In total, 61 per cent of all hedge funds experienced outflows for the quarter, while 39 per cent experienced inflows. Of these, approximately 20 funds experienced inflows of greater than USD500 million in 3Q, while nearly 25 funds experienced outflows of greater than USD500 million.
“The third quarter presented an extremely challenging performance environment, with asset volatility in many respects on par with financial crises in 2008 and 1998,” said Kenneth J Heinz (pictured), President of HFR. “However, as investor risk aversion increased across all asset classes, hedge fund investors have maintained a critical but forward-looking disposition, reinforcing their commitments to preferred strategy areas and core funds, and positioning their allocations to benefit from opportunities created by current dislocations and volatility.”
