Hedge Fund Inflows Dropped Sharply In The Second Quarter

by Phillip Morton, Investors Offshore.com

29 July 2005

Hedge fund inflows cooled substantially in the second quarter of 2005, as money placed into hedge funds by investors fell by 60% compared to the first three months of the year.

According to figures released by Chicago-based Hedge Fund Research Inc., hedge funds attracted $10.9 billion in new investment in the second quarter. This is significantly lower than the amount of new investment into hedge funds in the first quarter, which HFR said reached a near record $27.4 billion.

Relatively poor returns from the hedge funds industry in the first half of the year, when hedge funds returned 0.13% on average, are being seen as the primary reason for the declining inflows. While this still beat the 1.7% decline in the Standard & Poor's 500 Index, hedge fund returns have fallen far short of what investors have become accustomed to since the equity bear market.

"It was a very challenging quarter from a performance perspective and we saw that hedge fund investors are clearly being cautious about allocating new funds to the industry," observed Josh Rosenberg, president of Hedge Fund Research.

However, hedge fund inflows for the first half of 2005, which totaled $38.3 billion, are 29% above the level seen in the corresponding period in 2004. Total hedge funds assets are now said to total $1.03 trillion.

Unsurprisingly, the least popular strategy this year has been convertible arbitrage, which saw outflows of $5 billion (equal to 15% of total assets held in the strategy) in the first half of the year after sustaining average losses of 5.5%.

The most popular hedge fund strategies in 2005 have been those focusing on equities and macro funds, which trade stocks, currencies, commodities and interest rates from a macroeconomic perspective.

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