A Look at Q2 Hedge Fund Asset Flow

HedgeFund.Net has compiled Q2 asset flow trends in the hedge fund industry. Surprisingly, in Q2 the bulk of the increase in AUM (a 5.9% increase to $1.8 trillion) was primarily performance driven rather than coming from investor flows. The trend of outgoing investor flows seems to have moderated but as of June was still negative. It is possible that at the market's peak in July, investors finally starting allocating capital to select performing strategies, just as the market was peaking. And as anyone within earshot of a hedge fund in 2008 will attest, money flows out much faster than in. If the same investors are bitten again once the melt up has no more room to grow, it should get quite interesting.

As for Fund of Funds: the casket beckons.

Q2 2009 asset flow overview commentary:

- The total estimated assets managed by hedge funds, excluding double counting of assets in funds of funds, increased by 5.9% in Q2 2009 to $1.792 trillion.

The increase was mainly driven by performance, but investor flows turned to a net inflow in May and June. May showed the first sign that investors were allocating more than they were redeeming with a net inflow of $16.0 billion. The trend continued in June as net inflows increased to $18.7 billion. For the quarter, total assets increased $99.2 billion. Performance gains accounted for a $124.2 billion increase while investor flows accounted for a net outflow of $25.0 billion. The investor’s net outflow for the quarter was due to large redemptions in April not being surpassed by the net inflows in May and June.

- In the first half of 2009, total hedge fund assets fell 7.3%. Performance added $139.7 billion while investors accounted for a net outflow of $280.6 billion.

It is important to note that investor outflows appeared to peak in December 2008 and since then the trend has slowly reversed, led by positive performance.

- Hedge fund investor flows appear to have turned a corner in May and June, though it also appears this trend has been primarily performance driven, with a few exceptions.

Emerging markets have produced some of the best performance in 2009 and have also seen the highest rates of investor allocations. Allocations into equity markets rose at an increasing rate towards the end of the quarter, however, market neutral equity funds had allocations increase at a faster rate than long/short equity strategies, which tend to be biased towards the long side.

The exceptions include CTA/Managed futures products which have had mediocre performance in 2009, but have attracted assets at an above average rate, most likely due to the positive performance generated by these funds in 2008. Convertible arbitrage managers have had excellent performance in 2009, but net allocations have been slow to show an increase in investor confidence. Convertible arbitrage funds had a huge exodus in assets in 2005 along with negative performance.

- Funds of funds appear to have not turned the corner quite as well as hedge funds in Q2 2009.

Outflows occurred at a far greater pace throughout the quarter. Even as hedge fund investor allocations were net inflows in May and June, funds of funds continued to see net investor redemptions in both months.

It is important to watch the coming months to see if this trend continues as this is the first noticeable indication that large investors are actively investing directly into hedge funds while removing money from funds of funds.

Historically, FoFs accounted for a range of 47-50% of hedge fund investments. At the end of Q2 2009, this percentage fell to 44%.

Comments

[LT Trader:]

Data presented, but no solid conclusions. Has there been any correlation analysis performed with respect to hedge fund flows. One thing for certain, hedge fund returns (based on ALL hedge funds) in the long-run isn't too far away from t-bills. In the end, most of the alpha goes to the 2 and 20 crowd. And if a hedge fund craps out, the 2 and 20 is collected until termination; then start new hedge funds. Rinse and repeat.

Yes, there are a few that are touted as great returners, but most of those are not available to Joe and Jane Public. Another recent one with great returns was just plain fraud.

Aug 18 02:57 PM

[whidbey:]

Is a case of rejection of risky funds (if it can be known), or simply a rejection of risk management via fund allocation? In any case, it seems clear that something has changed and it is worth knowing about.

The tax laws are likely to change since the Obama entourage has raised the specter of irresponsible speculators hiding out in hedge funds that can avoid taxes for their investors (to a degree). Uncertainty has affected everything and it is not over.

Aug 18 03:23 PM

[kulgogi:]

Query the impact of funds winding down (such as Pequot Capital -- ~$3 billion) on this figure.

Aug 18 06:26 PM

[Anonymous 2:]

It would be interesting to see similar measures of performance and inflows vs liquidations in the various Mutual fund sectors using Lipper or Morning Star or other managed index of managed funds in terms of annual net after fee performance and AUM vs the indices

Aug 19 10:41 AM

[lawrie.chan...:]

Asset flows do not show that another trend has emerged.

Investors now hold the power. Investors require more transparency and communication. Services that help funds managers use their reporting to improve investor care and treatment will attract attention of institutional investors. We build www.alternativedecisio... believing this trend will become mainstream soon.

Aug 20 07:59 AM

[Wampeter, F...:]

You dont really see the hedge fund guys banging the drums about that Warren Buffet $1M bet anymore do you?

More germane, since "the bulk of the increase was performance driven" it does tend to correlate that the stock market gains were leverage driven as liquidity was provided en masse to the financial system by the government rather than driven largely by increased investment capital.

The $24 question (which may be more for those of you with more to invest) is to what extent the 50% gains we have seen are based on leveraged investment and what extent are they based on increasing investment capital?

Aug 21 10:36 AM