Investors Pile Into Hedge Funds At Record Pace

by Phillip Morton, Investors Offshore.com

23 April 2007

The hedge fund industry saw record inflows of more than $60 billion during the first quarter of 2007, bringing total assets under management to $1.568 trillion, according to data released last week by Hedge Fund Research.

Inflows in the first quarter were almost 300% higher than in the fourth quarter of 2006, when the industry recorded $15.7 billion in new fund flows, and represented almost half of the $126 billion inflows received by the industry last year.

The most popular hedge fund strategy with investors last year was equities, which saw $20.4 billion in new money. This was followed by relative arbitrage, which received $10.3 billion. All strategies covered by the HFR research saw positive inflows in the first quarter. Funds of hedge funds saw inflows of $8 billion. A total of $684 billion is now invested in funds of funds.

Equity funds are also the most popular in terms of assets, with $442 billion. Meanwhile, assets in the event-driven and relative value arbitrage strategies both surpassed $200 billion in the first quarter.

After experiencing outflows of $1 billion in the final quarter of 2006, distressed strategies recovered well in the first quarter of 2007, receiving $7.5 billion.

“After a relatively quiet end to what was still a record-breaking year in 2006, investors have begun pouring money into hedge funds at a pace we have never seen before. To put the first quarter inflow into perspective, during the first three months of 2007 as much new money was invested in hedge funds as was recorded during the last six months of 2006,” said Ken Heinz, president of HFR.

“The trend in asset flow suggests that both individual and institutional investors are actively allocating to hedge funds, while the performance indicates hedge funds are exceeding these investors’ expectations," he added.

The HFRI Fund Weighted Composite Index returned 2.81% in the first quarter, with emerging markets yielding the strongest results at 5.06%. The next best returns were produced by merger arbitrage at 4.83%. During the first quarter of 2007, the S&P 500 returned 0.64%, while the MSCI World returned 2.06%.

Conversely, short selling lost money in the first quarter, shedding 4.58%. Market timing also saw negative returns for the quarter, finishing with losses of 0.34%.

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