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Hedge fund inflows steady in Q2 as consolidation continues

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Investors continued to allocate new capital to hedge funds in the second quarter of 2010 with the industry experiencing a net inflow of USD9.5bn, according to figures released by Hedge Fund Research.

Volatility returned to global capital markets in 2Q10 with the HFRI Fund Weighted Composite Index posting a decline of 2.5 percent, offsetting 1Q10 gains.

Total hedge fund industry capital ended the most recent quarter at USD1.65trn, down from USD1.67trn the prior quarter.

Following strong performance in 2009, hedge funds declined by 0.21 percent in the first half of 2010, as gains in credit sensitive strategies such as arbitrage and event driven were offset by losses in equity hedge and macro funds.

Capital inflows over 1H10 totalled USD23.2bn, a figure approximately 20 per cent of the record inflows in 1H07.

Continuing a recent trend, investors exhibited a clear preference for the industry’s most established firms in 2Q10, with USD8.8bn of the USD9.5bn total net inflow allocated to firms with greater than USD5bn in assets under management, which manage approximately 60 per cent of total industry capital.

This preference is also reflected in the mid-quarter announced merger between two of the industry’s largest firms, Man Group and GLG Partners.

Following outflows over the past two years, fund of funds experienced a continued, albeit moderated, outflow of USD2bn in the second quarter. Only 31 per cent of fund of funds experienced inflows in 2Q10, compared to 59 per cent of all single manager funds.

As global equity market correlation has increased in recent months, intra-industry hedge fund strategy performance correlation has declined, with the HFRI Relative Value Arbitrage and Event Driven Indices gaining 3.64 and 2.26 percent, respectively, for 1H10, while the HFRI Equity Hedge and Macro Indices declined by 1.71 and 1.16 per cent.

In the past five years, relative value and event driven have had correlations of +0.72 and +0.81 to equity markets, respectively.

“The current environment in the hedge fund industry continues to be dominated by investor preference for robust fund infrastructure, encompassing enhanced liquidity and transparency,” says Ken Heinz, president of Hedge Fund Research. “Investors have exhibited strong interest in products such as Ucits III-compliant funds and separately managed accounts, as well as in the larger funds in the industry. Further growth in transparent investment vehicles and greater clarity on global financial reform legislation will continue to shape the landscape of the alternative investment industry for the next decade.”

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