Early Year Gains Lead To Surge In Hedge Fund Inflows

by Phillip Morton, Investors Offshore.com

25 July 2006

The hedge fund industry has recorded some of its largest inflows of recent times as favourable hedge fund returns earlier in the year lured many to invest in the alternative sector once again.

According to the Chicago-based research firm Hedge Fund Research, more than $42 billion in new money was poured into the hedge fund industry by investors in the second quarter of 2006. This was almost double the amount placed in hedge funds in the first three months of the year when inflows reached $24 billion, and almost as high as total inflows for the whole of 2005, which reached $46.9 billion.

HFR calculates that total global hedge fund assets now stand at $1.225 trillion.

According to HFR, inflows in the second quarter of this year were higher than at anytime since the company began to record quarterly hedge fund flows in 2003.

"We saw record flows coming on the heels of stronger performance in the first quarter and we have seen historically that flows tend to follow performance," observed HFR president Joshua Rosenberg.

The average hedge fund returned about 6% in the first quarter of 2006, and funds focusing on emerging markets and commodities enjoyed particular success.

However, there has been something of a reversal of fortunes in the past two months amid turbulent markets, and this could reduce hedge fund inflows in the third quarter. In the second quarter HFR says that hedge fund performance has been more or less flat, with short-biased funds having generated the strongest returns.

Equity hedge funds were the most popular vehicle with investors in the three months to the end of June with these funds gaining $13 billion in new assets. Global Macro funds, which trade on macroeconomic trends in the various markets, were also popular, and gained $8.4 billion in the second quarter.

Fixed income arbitrage funds posted the biggest outflows in the second quarter, losing $164 million.

Recommended