Investors pulled back on investing in hedge funds in the volatile first quarter of this year with a net inflow of just USD16.5bn in new capital coming into the industry, according to Chica
Investors pulled back on investing in hedge funds in the volatile first quarter of this year with a net inflow of just USD16.5bn in new capital coming into the industry, according to Chicago-based hedge fund industry data provider Hedge Fund Research.
HFR also reported that there were more than 1,100 new hedge fund launches and more than 550 liquidations during 2007, and that the HFRI Fund Weighted Composite Index fell 3.06 per cent during the three months the end of March.
According to HFR, total capital under management in the hedge fund industry was virtually unchanged at USD1.875trn, compared to USD1.868trn at the end of 2007, and assets in funds of hedge funds were also virtually unchanged at just over USD800bn.
The 0.38 per cent increase in capital represents the smallest since the second quarter of 2004, and the 0.87 per cent capital flow represents is the smallest rise since the industry experienced a net redemption of capital in the final three months of 2005.
The slow start to 2008 follows a year in which investors allocated a record USD194bn to the industry. Selected strategies proved attractive to investors seeking to take advantage of current market conditions.
Investors allocated more than USD8.2bn in new capital to equity hedge strategies, which nonetheless saw total assets under management decline on weak performance, and more than USD6.5bn to relative value strategies. Funds seeking opportunities in distressed credit saw significant positive flows, with distressed and special situations strategies attracting a combined total of nearly USD8bn in new funds.
By contrast, investors redeemed nearly USD1bn from macro strategies, while within the event-driven group of strategies investors reduced capital in merger arbitrage funds by more than USD4bn.
Macro strategies were the top performers in the first quarter of this year, with the HFRI Macro (Total) Index gaining more than 4.7 per cent. Within this category, quantitative trend-following strategies gained more than 9 per cent. Since the increase in volatility during the third quarter of 2007, the HFRI Macro (Total) Index has gained more than 11 per cent.
Other strategies turning in solid performances during first quarter included short selling with a gain of nearly 7.5 per cent and equity market neutral, with a modest decline over the first three months of the year.
Both credit and equity strategies turned in weak performances, with equity hedge falling 5.7 per cent, and most arbitrage strategies declining between 4 and 5 per cent. Convertible arbitrage, emerging markets and technology-focused equities all declined by more than 6 per cent.
While several established funds were liquidated during the first quarter, investors also continued to allocate through the volatility. While the 50 largest outflows totalled more than USD32bn, the 50 top inflows exceeded USD46bn. These results include the liquidation of several funds that began the year with more than USD500m in capital.
‘The financial market volatility which characterised the second half of 2007 accelerated into the first quarter of 2008, resulting in a broad dispersion among the returns posted by fund strategies,’ says HFR president Kenneth Heinz. ‘In some cases, the performance differentiation has been extreme, ranging from liquidations to gains of hundreds of percent.
‘Investors slowed allocation in total and re-allocated from arbitrage and the more volatile macro strategies into more diversified strategies and those designed to identify opportunities in a weak credit market.’
HFR data is based on the more than 12,000 funds tracked historically by the firm, including more than 7,600 funds reporting to the company as part of the HFR Database subscription product.
