Global Hedge Fund Assets Near USD3 Trillion

by Phillip Morton, Investors Offshore.com

25 August 2008

After last week's announcement that there are now more than 10,000 funds registered in the Cayman Islands, the jurisdiction of choice for hedge funds worldwide, HedgeFund.net has released the Q2 2008 Hedge Fund Asset Flows and Performance Report, which estimates that total hedge fund assets increased 4.41% in the second quarter of this year to USD2.973 trillion.

The HFN report is unique in its comprehensive approach to tracking asset flows as it combines a bi-annual survey of hedge fund administrators along with information from the industry’s largest active database of hedge fund information to compile total industry asset and flow data.

According to the report, investors allocated an estimated USD34.21 billion to hedge funds in Q2 and performance gains added an additional USD91.28 billion to total assets. The dollar amount of fund liquidations during Q2 was larger than new fund launches by an estimated USD8.52 billion; the third highest level of fund closures on record. Despite liquidations, large funds appear to have attracted enough capital to grow the hedge fund industry at an organic growth rate (change in total assets excluding performance) of 11.06% in the last year.

Fund of funds experienced net withdrawal of investor assets in Q2 2008 for the second time on record. FoF liquidations were greater than new fund launches and allocations to existing funds by an estimated USD470 million. Allocations to existing FoFs were the third lowest dollar value on record and lowest as a percentage of total FoF assets. Performance gains actually lifted total FoF assets to an estimated USD1.439 trillion, an increase from Q1 of 2.43%.

Hedge funds located in Europe saw the largest rate of organic growth. New allocations of USD21.47 billion to funds located in Europe increased total assets 2.62%. Combined with performance gains, total European hedge fund assets rose an estimated 4.80% to USD857.65 billion. Funds operating in Asia saw total assets fall an estimated USD3.12 billion from a combination of performance losses and investor withdrawals. Redemptions alone resulted in Asian hedge fund assets falling USD1.14 billion in Q2.

For the third consecutive quarter, investors have reduced allocations to equity strategies and increased allocations to fixed income related strategies. Equity focused hedge fund assets experienced a net outflow of investor assets of USD6.18 billion from Q1, however performance gains lifted total equity fund assets 2.16% during the quarter. Fixed Income strategies experienced organic growth of 3.04% during Q2 and when combined with performance gains resulted in total fixed income focused fund asset increasing 6.55% from Q1 to an estimated USD613 billion.

Funds focusing on corporate fixed income related securities accounted for the majority of the increase. These funds saw organic growth of 7.59% in Q2, despite a slight net outflow from fund liquidations. Funds focusing on mortgage related fixed income securities experienced the highest rate of growth within fixed income strategies in Q2. These funds saw total assets rise 19.05% to an estimated USD35.04 billion and organic growth accounted for the vast majority of the increase. In Q1 and Q2 08, new allocations from investors increased mortgage related fund assets 14.35% and 16.92%; a sign of significant investor interest.

Allocations to emerging market hedge funds have slowed significantly in the last three quarters. In Q2 08, new allocations increased total assets by only 0.64% from Q1 compared to 10.64% a year ago. Performance gains during Q2 resulted in a rise of total EM assets of 2.55% during the quarter, but gains were far below Q1 performance losses of USD27.80 billion.

Losses in Q4 07 and Q1 08 led to redemptions in emerging Asia focused funds in Q2 08. Funds investing in Latin America saw net investor redemptions as well during the quarter. The outflow was small, a decline of 2.86% following a near record of organic growth in Q1 of 31.17%. When performance gains are included, total LatAm focused fund assets rose 6.61% in Q2 08 to an estimated USD22.53 billion.

Total assets in funds investing in Developing Europe increased 9.39% in Q2 to an estimated USD99.77 billion. Investors allocated an estimated USD3.16 billion to these funds resulting in organic growth of 3.46%. Funds investing in Africa/Middle East experienced their highest total of new allocations in Q2 as investor interest in the region expanded. Total assets in these funds rose 18.78% in Q2 with new allocations of USD733 million.

Dislocations in credit markets and credit related securities in recent prior quarters, event driven and special situations funds experienced record growth in Q2 2008. Total assets in these funds increased 16.31% to USD390.42 billion. New allocation accounted for the highest level of growth for these funds since 2004. Investors allocated an estimated USD32.26 billion to existing funds and the net of new launches and liquidations accounted for a record inflow of USD13.55 billion.

Total assets increased an estimated USD23.11 billion to USD275.43 billion in Q2 08. Investor interest in distressed securities has risen for three consecutive quarters and the strategy saw organic growth of 4.05% in Q2 versus 2.04% in Q1 and 0.96% in Q4 2007.

CTA/Managed Futures products have been prime beneficiaries of broadly rising commodity prices. In the past four quarter these funds have experienced increasing rates of organic growth. In Q2 08 investor allocations increased assets 7.28%, the highest rate of organic growth in four years. Total CTA/Managed Futures assets reached an estimated USD218.36 billion in Q2.

Conversely, Energy Sector hedge fund assets, which are primarily long biased energy sector equity focused managers, have seen allocations decline at an increasing rate in the past three quarters. The drop in Q2 was 6.63%, the highest on record. Still, at an estimated USD122.49 billion, these funds are by far the largest industry specific group tracked by HFN.

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