The rush towards the exit that characterised the hedge-fund sector in the second quarter of 2000 went into sharp reverse in the third quarter, with $4.2bn of net new assets going into the sector compared with an outflow of $4.9bn in the second quarter.
Hedge fund investors,
signaling a desire for protection in a volatile market,
rewarded long/short equity funds with $3.5-billion,
or 83%, of all new assets going into hedge funds during
the third quarter, according to figures gathered by
TASS Research, the information and research subsidiary
of Tremont Advisers, Inc. "It seems very clear
that, in this extremely volatile market, investors
are shying away from the directional strategies like
global macro in favor of "hedged" styles
that can generate returns with little or no correlation
to the markets," commented Bruce Ruehl, Chief
Investment Strategist, Tremont Advisers.
Perhaps this trend also reflects the growing awareness of and acceptance of hedge funds among the more conventional type of 'mass affluent' investor, and the increasing availability of hedge funds even in highly regulated jurisdictions like the UK and Germany.
"During this year, many long/short equity hedge fund managers have performed significantly better than either the broad market or the traditional long-only managers," said Nicola Meaden, CEO, TASS. "The demand for long/short equity funds with low net exposure has been particularly strong and this trend is likely to continue."
The event driven category was the second largest recipient of assets during the quarter, pulling in $1.6-billion, or 38%, of the new third quarter asset flows. The investments flowed primarily into the risk arbitrage sub-sector, especially in the U.S. and Europe. Conversely, the distressed securities sub-sector of the event driven category experienced net outflows as investors became increasingly concerned about the growing supply of undesirable paper and falling demand.
Both the convertible arbitrage and equity market neutral categories attracted healthy inflows during the quarter. Convertible arbitrage, the hottest performing category of 2000, saw the largest flow of new assets since immediately before the Russia/LTCM debacle in the third quarter of 1998. It attracted $563-million.
Equity market neutral saw inflows of $460-million, a lower level than that of the second quarter, largely reflecting the fact that many managers in this category have closed to new investment.
According to the TASS data, investors continue to be wary of the global macro funds and redeemed nearly $1.4 billion in the third quarter. Global macro now represents approximately 10% of assets under management in the hedge fund industry compared with 30% at the beginning of 1994. Money also flowed out of the managed futures (-$272-million), emerging markets (-$133-million) and short selling (-$66-million) categories. And, a very small percentage - less than 1% of all asset flows for the quarter (-$32-million) - came out of fixed income arbitrage, signaling a slowing of the redemptions from this category compared to the previous three quarters.
TASS Research provides data on the performance of more than 2,500 alternative investment managers and funds. It is a subsidiary of Tremont Advisers, Inc., the integrated investment services company specializing in alternative investments. Tremont, through its subsidiaries, has more than $1 billion in its proprietary products and has more than $200 million in insurance policies in force, which are invested in alternative investments.
Information in the TASS+ Asset Flows Report for the third quarter 2000 has been sourced from the TASS+ database of hedge funds. Only those funds that provide assets under management have been included. 2,270 funds have been included in the research, 625 of which are "graveyard" funds i.e. those in existence at some point during the period January 1994 to September 2000, but now closed down.
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