Hedge Fund Assets Top $2.5 Trillion

by Carla Johnson, Investors Offshore.com

16 August 2007

Total hedge fund asset levels increased by 8% in the second quarter of 2007, to $2.593 trillion from $2.401 trillion in the first
quarter of 2007, according to a report by HFN (HedgeFund.net).

The Q2 2007 HFN Hedge Fund Industry Asset Flow Report, which details total assets and asset flows across strategies, sectors, regions and asset classes in which hedge funds operate, revealed that new assets allocated to the industry were estimated at $107.3 billion in Q2, while performance gains accounted for an additional $89.6 billion, the second largest gains on record.

In the first six months of 2007, hedge funds assets rose 20.4% including $268 billion in new allocations.

Major trends of note included:

Long/Short Equity assets increased 7.7% to an estimated $766.5 billion: The broadest of all hedge fund strategies, long/short equity funds rode the rise in global equity markets during the first half of 2007, bringing in an estimated $15.3 billion in new allocations in Q2. However, the majority of the total asset level rise came from fund performance, which added an additional $39.3 billion, the second largest increase on record. In the first half of 2007 long/short equity funds attracted $48 billion in new allocations.

Fixed Income focused fund asset growth slowed as liquidations increased and performance lagged: After increasing by the fastest rate on record in Q1 2007, total asset growth in fixed income focused funds slowed to a 5.5% growth rate. Assets reached an estimated $468.5 billion, which includes $23.2 billion in new allocations in the second quarter. As a result of difficulties in credit markets stemming from losses tied to sub-prime mortgage lending practices, fixed income funds experienced near record liquidations of $3.9 billion in the quarter, while performance gains added $5.4 billion, the smallest contribution to asset growth since 2005.

Emerging Markets attracted near record allocations: Investors continued to move into EM in near record fashion in Q2 2007, despite rumblings that the space was becoming crowded. Total assets in EM funds increased 14.2% in Q2 2007 to $279.3 billion, including $20.9 billion in new allocations, the second highest quarter on record. This was the fourth consecutive quarter of double digit growth. In the first half of 2007, EM funds have attracted $38.2 billion in new allocations

Emerging market equities have been the best performing specialization within the hedge funds industry in recent quarters, and consistent increases in new allocations bear this out. A record $5.4 billion in new allocations in Q2 2007, along with strong performance, increased total assets 13.7% to an estimated $95.2 billion. Total assets in EM debt focused funds rose at the second fastest rate on record, an increase of 9.5% to $75.7 billion, including $4.8 billion in new assets.

Global Macro fund assets reached $131.8 billion in Q2 2007: After disappointing performance in 2006 and a net outflow from redemptions in Q1 2007, allocations to macro funds reached their highest level in a year. Total asset levels increased 9.6%, including $6.9 billion in new assets

Multi-Strategy fund growth showed no signs of slowing: Multi-strategy funds are increasingly being viewed as a viable reduced- fee diversification alternative to fund of funds for large institutional investors. As a result, Q2 2007 was the third straight quarter of double digit growth, including $22.8 billion in new allocations which brought total assets to $321.9 billion, an increase of 10.5% from Q1 2007.

Distressed fund assets rose 10.8% in Q2 2007: Distressed funds have produced steady returns in recent quarters, while remaining relatively uncorrelated to broad equity markets. This favorable characteristic is a main reason distressed funds experienced a third consecutive quarter of double digit growth rates in Q2 2007, attracting $9.54 billion in new allocations, to bring total assets to $191.7 billion, an increase of 10.8% over Q1 2007. In the first half of 2007, distressed funds have attracted $34.2 billion in new assets.

Regional Asset Flow Trends:

After poor performance in 2006 spilled over into Q1 2007, Japan focused funds again had the highest percentage of redemptions for any fund categorization, an outflow of $9.8 billion, resulting in total assets dropping 20.5% to $37.9 billion.

Total assets in funds with a global investment focus increased 8.92% in Q2 2007 to $1.276 trillion, including $57.5 billion in new assets. Total assets in funds investing in European markets increased 7.6% to $403.2 billion, including $14.6 billion in new assets, while those investing in US markets increased 7.6% to $699.4 billion, including $40 billion in new assets.

Assets in funds investing primarily in Latin America increased by 17.4% to $11.8 billion. Through the first half of 2007, assets in Latin America focused funds have risen an estimated 73.2% as the region continued to produce strong returns.

Fund of Funds:

Total fund of fund assets, which are not double counted in the total industry figure, increased 9.4% to an estimated $1.250 trillion, including $74.5 billion in new assets, the largest quarterly new allocation on record.

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