« Capitals of capital | Main | August puts hedge funds back on track for double digit 2006 »
September 4, 2006
Institutional players ensure hedge funds are here to stay
Despite so-so performance in the second quarter, hedge funds in the United States pulled in a lot of money from investors, highlighting two trends.
One is that the floodgate of institutional money, which appeared to slow last year, has reopened. The other is that hedge funds, despite their lacklustre returns, are looking attractive on a relative basis.
Hedge funds, on average, gained 0.17% in the second quarter, according to Hedge Fund Research in Chicago. But investors poured $42.1bn (£23.5bn, E34bn) of net new cash into these funds during that period. It marked the biggest jump in quarterly flows since Hedge Fund Research began tracking flows quarterly in 2003, and a large gain from the first quarter of this year, when hedge funds took in about $24bn net.
July’s returns weren’t great, with the Hedge Fund Research Composite Index down 0.21%. Still, some strategies have had good years, with emerging markets up 10.4% this year through July, energy up 11.06% and convertible arbitrage, which had been left for dead last year, up 7.01%.
A note of caution: hedge fund indexes are not as precise as, say, the Standard & Poor’s 500 or the Nasdaq 100. Rather, they are proxies for underlying returns. But these indexes do give an idea of what’s going on with hedge fund performance.
Fifteen months ago, it might have been fair to ask whether the popularity of hedge funds had peaked after several years of robust inflows from investors. The answer then would have been not yet, judging from the second-quarter flows, which marked a rebound from a wan 2005 – including fourth-quarter net outflows.
Robert Schulman, chief executive of Tremont Capital Management, a fund of funds in Rye, New York state, points out that hedge funds held up quite well relative to long-only markets. And the slight second-quarter gains many hedge-fund indexes registered outpaced the Standard & Poor’s 500 index, which fell nearly 2%. Schulman adds that institutions, including pension funds, have begun allocating a lot of money to hedge funds.
Schulman also points out that “everybody’s still chasing returns,” including structured products such as portable alpha (see box). In those portfolios, managers divide investing into two broad categories: beta, or market exposure via some kind of an underlying derivative, and alpha, which entails performance not correlated to – and presumably better than – the overall market.
What’s likely to be happening is that institutions, with billions waiting in the wings, are becoming a bigger force in the hedge fund industry than previously. A 2004 report by the Bank of New York and Casey Quirk & Associates, a consulting firm, estimated that institutional investors in the United States will have put $300bn into hedge funds within five years, up from $60bn at the time of the report.
Carrie McCabe, president of FRM Americas, whose parent has $12bn under management, points out that hedge funds, compared with equities and bonds, have done relatively well this year as investors “look for some place to make returns”. Hedge funds, she continues, “are not going away, especially in times when the traditional long-only markets are not moving” – and not in the lower-return environment that McCabe thinks is unfolding.
HedgeFund.net, which also tracks flows and returns, recorded strong second-quarter flows, as well. HedgeFund.net estimates that single-manager hedge-fund assets total about $1.7 trillion. That compares with HFR’s $1.23 trillion. Second-quarter net flows into existing hedge funds totalled $77.2bn, according to HedgeFund.net. However, investors put less emphasis on funds in the United States and paid more attention to funds with a Western European or global bent.
Investors cooled on Eastern European funds, and there were also outflows from funds focused on Japan, according to Peter Laurelli, a research analyst at HedgeFund.net.
Energy funds added significant assets in the quarter, while emerging-market funds attracted less money, although flows were positive, according to HedgeFund.net. And investors put more money into relative-value strategies, including convertible arbitrage, no doubt drawn by the improved performance. At the same time, long-short assets – the category encompassing long-short equity funds – grew by 2.6% to just under $600bn, the second lowest growth rate in 10 quarters, according to HedgeFund.net.
-The Business Online.com-
Posted by su at September 4, 2006 11:21 AM