Hedge Fund Inflows Weaken In Third Quarter

by Phillip Morton, Investors Offshore.com

24 October 2005

New fund flows into hedge funds slowed to $9.4 billion in the third quarter, down from $10.9 billion in the second quarter and $16.9 billion in the third quarter 2004, according to data released by leading hedge fund data and performance specialist, Hedge Fund Research.

Nonetheless, the slowdown in new assets has coincided with a jump in hedge fund returns, which reached 5.38% in the third quarter, compared to 1.12% in the previous quarter. This compared to returns of 3.61% for the Standard & Poor’s 500 and 6.58% for the MSCI World Index during the same period.

For the year, the HFRI Composite Index, an average of overall hedge performance, is up 7.36%. Total industry assets stood at $1.1 trillion as of September 30, 2005, HFR said.

Strategy-wise, emerging markets turned out to be the star performer returning 10% for the quarter and nearly 16% year to date. Sector funds were up 6.75 per cent for the period, led by Energy, which climbed 14.78 per cent. Macro funds, returned 3.57 per cent in the quarter and pulled in US$944 million.

Equity hedge returned 6.11 per cent in the third quarter and remained the the single largest category with just under US$320 billion in assets, collecting US$1.9 billion in new fund flows.

Event-driven was up 4.28 per cent for the period, and attracted US$2.5 billion in new assets. Year-to-date, Event-driven continued to be the most popular strategy with investors, attracting a total of US$10.9 billion in new assets.

Meanwhile, Funds of funds (FOFs) saw an outflow of more than US$1.2 billion in assets in the third quarter. This compared to inflows of US$3.5 billion in the second quarter, and $6.2 billion in the third quarter of 2004.

Joshua Rosenberg, president of HFR, believes the decline in asset flows in the third quarter is linked to the poor performance of hedge funds in the first half of the year.

"This caution is reflected in the continued decline in asset flows which we’ve seen now for three consecutive quarters,” he observed.

“Recent returns have picked up, however, and some hedge fund managers believe that market volatility is returning as well. Both factors should draw increased investor interest to the sector going forward," he added.

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