Hedge fund inflows booming despite poor performance

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HFR's president Kenneth J. Heinz

Despite hedge funds having suffered the worst performance start to the year since 2011, industry assets hit a new peak of $2.7 trillion thanks to healthy net inflows.

The HFRI Fund Weighted Composite index, for example, returned 1.1% in the quarter ended March 31, compared to first-quarter returns of 3.6% in 2013, 4.7% in 2012 and 1.7% in 2011, according to data from Hedge Fund Research Inc., which produces the index.

First-quarter 2014 returns of other major hedge fund indexes also were low compared to previous years, led by the 1.5% return of the Hennessee Hedge Fund index, and followed by the Barclay Hedge Fund index, 1.4%; Preqin All Hedge Fund Strategies index, 1.2%; Eurekahedge Hedge Fund index, 0.9%; and the Lyxor Hedge Fund index, 0.5%.

The eVestment LLC database's Hedge Fund Aggregate return was 1.2% for the three-month period.

“The mood entering 2014 was buoyant for the hedge fund industry, following two back-to-back years of double-digit returns,” said Amy Bensted, Preqin's head of hedge funds products, in the London-based researcher's first-quarter hedge fund performance report. “However, the first quarter of 2014 has been one of mixed results.”

The HFRI Hedge Fund index, for example, was down 0.5% in January, up 2% in February and down 0.3% in March.

Despite slight dips in aggregate performance in the months of January and March, investment performance and net capital inflows throughout the quarter were sufficient to push hedge fund industry assets to a new peak of $2.7 trillion as of March 31, according to Hedge Fund Research, Chicago.

The first quarter was the industry's seventh consecutive quarter of record-breaking net growth, HFR said in its most recent research report, released April 21.

Asset growth in the first quarter of 2014 was up 2.8% from $2.6 trillion as of Dec. 31, HFR said in the report.

The jump in aggregate hedge fund industry assets was the result of the combination of $26.3 billion in net inflows and $47 billion of net investment performance gains.

HFR noted in its report that net inflows in the three-month period ended March 31 were the highest quarterly inflow since the second quarter of 2011 when net inflows totaled $32.5 billion.

If the current pace of new money continues, net inflows for calendar 2014 will top $105 billion, making it the best year since 2007, when net asset growth totaled $195 billion, historical HFR data show.

Hedge funds of funds experienced “a modest outflow of $375 million,” said HFR's report, “narrowly missing the chance to end a streak of 12 consecutive quarterly outflows dating back to (first quarter) 2011.”

One bright spot for hedge funds-of-funds managers was that aggregate investment performance gains of $1.6 billion in the first quarter pushed the industry's total assets to $665.1 billion, up slightly from $663.1 billion as of Dec. 31.

Equity hedge fund strategies experienced the high net inflows in the first quarter of $16.3 billion, followed by relative value strategies, $11.2 billion, and event-driven approaches, $4.1 billion. Macro hedge funds had net outflows of $5.3 billion, according to HFR tracking data.

Event-driven funds lead pack

In terms of investment gains during the three-month period, event-driven funds lead other strategies with $19.5 billion, trailed by relative value hedge funds, $15.3 billion; equity hedge strategies, $10.7 billion; and macro funds, $1.5 billion.

By way of explanation for industrywide growth during the three-month period, despite seesaw hedge fund performance, “capital growth accelerated in (first quarter) 2014 as equity markets eclipsed new highs before experiencing powerful reversals in many of the equity beta trends which defined 2013 performance,” said Kenneth J. Heinz, HFR's president, in a news release.

“Both fundamental valuation concerns as well as increasing macro/geopolitical uncertainty contributed to an increase in investor risk aversion,” Mr. Heinz added.

“Global equity markets experienced their version of March Madness as fears of Russian expansionism, (Federal Reserve) tightening and slowing growth in China spiked intramonth volatility,” Sol Waksman, founder and CEO of BarclayHedge Ltd., further explained in a news release. The Fairfield, Iowa-based company compiles the Barclay Hedge Fund index.

“Diversification over macro and micro themes, relative value, in-depth alpha extraction and capital preservation are key allocation focuses. This is the exact hedge funds' job spec,” wrote Jean-Baptiste Ber-thon, senior cross-asset strategist at Lyxor Asset Management, Paris, in the firm's April industry barometer report. Lyxor AM compiles the Lyxor Hedge Fund index.

This article originally appeared in the April 28, 2014 print issue as, "Hedge fund inflows booming despite poor performance".