Hedge fund data reveals changing trends in asset flows

Hedge have funds recorded their first quarterly net inflows in more than a year, with investors adding $1.1 billion in capital during the third quarter, according to data released by Hedge Fund Research (HFR). However, there were sharp variations in the flows into different fund types and strategies.

Hedge funds raised over $38 billion in new capital in the third quarter, with over two thirds of all hedge funds experiencing inflows during this period.

This capital inflow was largely offset by over $37 billion in outflows from redemptions and liquidations, resulting in a net inflow of just $1.1 billion.

Inflows were concentrated in equity hedge and macro funds, which saw over $6.8 billion in net inflows in the quarter. By contrast, relative value and event driven strategies experienced total net redemptions of more than $5.7 billion, even though they have exhibited strong performance so far in 2009.

HFR also found that managers with less that $500 million in total assets under management (AUM) raised more capital than their larger counterparts. These managers attracted a combined total of $4.8 billion in net inflows, while managers with over $500 million in AUM saw net outflows of $3.7 billion.

Hedge fund companies with AUM over $5 billion were hardest hit by redemptions, with net outflows of over $3 billion. Managers with under $100 million in AUM were the biggest gainers, with net inflows of over $2 billion.

The inflows into smaller hedge funds marks a change in direction for the industry, noted Ken Heinz, president of HFR. "As risk tolerance has increased, investors are looking at investing away from the most established managers," he said.

Capital is coming back into hedge funds at a time when the industry is posting some its strongest returns on record. Hedge fund performance climbed 6.9% in the third quarter, increasing year-to-date returns across the industry to 17.1%, according to HFR.

These performance based gains sent total hedge fund industry assets to $1.53 trillion, up from $1.43 trillion in the second quarter.

Performance across the industry remains widely dispersed, HFR noted. The top 10% of hedge funds have generated average gains of over 52% for the 12 months ending September 2009, while the bottom 10% is down 33.86%.

Around 70% of hedge funds are in positive territory for the 12 months to the end of September. However, almost the same percentage of hedge funds remain below their high watermark following the losses in 2008, HFR said.

"The most recent data suggests that the sentiment of hedge funds investors has improved from historical lows, but investors remain selective about fund strategy and exposure characteristics, said Heinz.

"Sharp performance dispersion across funds, strategies and time frames in the last five quarters has contributed to a more tactical allocation environment where both expectations and positioning can vary widely from one investor to the next," he added.

While asset flows into hedge funds have rebounded, fund of hedge funds continued to see net redemptions in the third quarter, albeit at a reduced rate.Fund of fund redemptions in the third quarter totaled 3.2 billion compared to a cumulative withdrawal of more than $180 billion over the previous year.

Over 73% of all fund of funds experienced net outflows in the third quarter, according to HFR.