Inflows continue albeit it to largest managers, Hedge Fund Research data indicates

23 Jul, 2012

Investors continued to allocate new capital to hedge funds in the second quarter of 2012 albeit to the largest managers and strategies with low exposures to global equity markets, according to Hedge Fund Research data.

There was $4.1 billion in net new capital to hedge funds in the second quarter bringing inflows up to $20 billion so far this year. However, this was offset by poor performance which saw total industry capital fall by 1.3% from $2.13 trillion to $2.10 trillion.

Hedge funds with Assets under Management (AuM) greater than $5 billion attracted $11 billion in the second quarter while sub-$5 billion managers saw redemptions of approximately $6.9 billion.

The flight to size is an ongoing concern for smaller hedge funds. A 2012 J.P. Morgan survey revealed pension funds (67%) and insurance companies (57%) would not consider a manager with less than $250 million AuM although this was attributable to binding concentration and risk limits. Start-ups too are being hurt. A 2012 Citi Prime Services paper said just $12.4 billion or 0.6% of total AuM had been invested into start-ups since 2009.

The data revealed 30% of all funds experienced inflows in the second quarter totaling a net $43.3 billion while 70% experienced outflows of around net $39.2 billion.

Fixed income based relative value arbitrage strategies saw $10 billion inflows with the HFRI Relative Value Index up 4.2% in the first six months of the year. This represents the strategy’s 35th positive monthly performance out of 42 since December 2008. Total hedge fund capital in relative value strategies now stands at $555 billion and is fast approaching the $570 billion invested in equity hedge, the industry’s most popular strategy.

Equity hedge, however, saw a net redemption in the second quarter of $1.3 billion despite the HFRI Equity Hedge Index gaining 2.2% in the first six months. Macro, particularly CTA and currency strategies saw a reversal of fortune with outflows of $3.5 billion. The HFRI Macro has seen a decline of 0.5% in the first six months. Event driven strategies were also a casualty with modest withdrawals of $900 million despite a 2.5% gain in the first six months.

Ken Heinz, president of Hedge Fund Research, said performance and capital flows were being driven by the ongoing European sovereign debt crisis and the “recent softening of US economic data.”

AuMCitiequity hedgeHedge Fund ResearchJ.P. Morganmacrorelative value