Hedge fund return volatility continues

After the hedge fund industry
posted negative returns of 3.2 per cent in May and 1.1 per cent in June, hedge
funds gained 2.15 per cent in July, according to the Barclay Hedge Fund Index
compiled by BarclayHedge. The Index is up 2.2 per cent for the year to date.

TrimTabs Investment Research and
BarclayHedge had previously reported that the hedge fund industry posted an estimated
outflow of $3.7 billion, or 0.2 per cent of assets, in June 2010.

This followed net inflows of $4.9
billion in May and net outflows of $2.5 billion in April.

“Redemptions probably persisted
through July, and they could pepper the remainder of the year,” said Sol
Waksman, founder and president of BarclayHedge. The research suggests that as
investors typically cannot redeem immediately, the industry may see more
redemptions in the coming months.

“Even if performance hadn’t been
poor in May and June, July is historically one of the worst months of the year
for fund subscriptions, and seasonality will be working against inflows through
December,” added Mr. Waksman.

The statistics showed not only that
investors were reacting quickly to poor performance, but also that they were
becoming more risk averse by favouring defensive strategies. Net outflows in
emerging market funds of $2.1 billion were contrasted by net inflows of $1.4
billion into fixed-income funds.

A different picture

Statistics by data provider Hedge
Fund Research paint a somewhat different picture as far as capital inflows are

HFR indicated that investors
continued to allocate new capital to hedge funds in the second quarter of 2010.
Hedge funds received a net inflow of $9.5 billion in the second quarter,
bringing the total net inflows for the first half year to $23.3 billion, HFR

But HFR data confirms the
volatility of hedge fund returns. In the second quarter of 2010, the HFRI Fund
Weighted Composite Index posted a decline of 2.5 per cent, offsetting the first
quarter gains.

Both data providers agreed that
funds of hedge funds continued to lose investor capital. BarclayHegde said
funds of hedge funds recorded redemptions of $4.6 billion resulting in a total
for the year of $15.2 billion. HFR reported a more moderate outflow of $2
billion in the second quarter.

HFR also noted the continuation of
a recent trend, according to which investors showed a clear preference for
established firms, as $8.8 billion of the $9.5 billion total net inflow was
allocated to firms with more than $5 billion in assets under management.

“The current environment in the
hedge fund industry continues to be dominated by investor preference for robust
fund infrastructure, encompassing enhanced liquidity and transparency,” said
Ken Heinz, president of Hedge Fund Research. “Investors have exhibited strong interest
in products such as UCITS III-compliant funds and separately managed accounts,
as well as in the larger funds in the industry. Further growth in transparent
investment vehicles and greater clarity on global financial reform legislation
will continue to shape the landscape of the alternative investment industry for
the next decade,” he predicted.

A report published in August by
financial research firm Preqin featured survey results that were comparatively
optimistic for the hedge funds industry. More than a quarter (29 per cent) of
the institutional investors surveyed said they would increase their allocation
to hedge funds over the next 12 months. This figure increased to 46 per cent
for a long-term period of three to five years. Only 15 per cent and 10 per
cent, respectively, indicated that they would reduce their exposure to hedge
funds during these time periods.

The vast majority of surveyed
institutional investors (69 per cent) stated that they were satisfied with the
performance of their hedge fund investments, the report, The Next 12 Months:
Institutional Appetite For Hedge Funds, said.