Hedge Fund Asset Flows 3Q07: Event-Driven Strategies Growing Fastest

Net hedge fund industry inflows increased US$39.3 billion during third quarter 2007, and a performance gain of US$18.9 billion led to net hedge fund assets of an estimated US$1.73 trillion at the end of September 2007. This continued the scorching pace of the second quarter, which came in with total inflows of $41.1 billion and marked the third highest quarterly inflows since second quarter 1994 (US$43.3 billion). It brought the combined year-to-date inflows to US$101.1 billion, up 9% over the same period in 2006. On a rolling 12-month basis inflows reached US$114.8 billion to exceed the record-setting 2006 calendar year number of US$106.1 billion.

By hedge fund strategy the biggest inflows in U.S.-dollar terms (US$15.5 billion) were seen by the Event-Driven strategy, followed by Long/Short Equity at US$11.6 billion and Multi-Strategies at US$9.0 billion. This marked an increase of inflows into Event-Driven and Multi-Strategies and a modest drop for Long/Short Equity.

In terms of percentage of assets under management the three highest quarterly growth rates were experienced by Dedicated Short-Bias (coming from a low absolute base) with 8.25%, then Event-Driven with 5.49% and Multi-Strategies with 5.47%.

By hedge fund strategy net outflows were experienced by Fixed Income Arbitrage with US$5.1 billion and Managed Futures with US$105 million.

All other strategies posted positive flows. In terms of percentage of assets under management the quarterly rate declined 7.38% for Fixed Income Arbitrage and 0.21% for Managed Futures. The decline in Fixed Income Arbitrage was certainly noteworthy and marked the largest single quarterly outflow experienced since our numbers began. In contrast to Managed Futures the Global Macro strategy, often synonymous with the Managed Futures investment style (systematic and across liquid asset classes), actually reported positive flows following three consecutive quarterly outflows.

In terms of the overall picture the drivers for this sustained positive inflow growth came from ongoing institutional allocations in a period of heightened volatility across many asset classes, which was also a period with strong trends in currencies, equities, energy, and commodity markets. This came in spite of strains among certain strategies such as systematic models or so-called statistical arbitrageurs and Managed Futures/CTAs. These suffered from bouts of sudden volatility and liquidity issues, which spurred forced selling of winning as well as losing portfolio positions in late July and early September.

Inflows appeared to have followed returns for third quarter 2007. The three worst performing hedge fund substrategies were Managed Futures—posting minus 4.51%, Fixed Income Arbitrage with minus 1.02%, then Event-Driven: Distressed Securities at minus 0.85%. Asset outflows were experienced by the Fixed Income Arbitrage and Managed Futures substrategies.

Article written by Aureliano Gentilini and Ferenc A. Sanderson

Comments

[HedgefundAn...:]

Typical contrary indicator. Event-driven is levered short-vol right now. Meanwhile the FI Arb guys are providing strong risk-adjusted returns and trends are manifesting for the managed futures players to exploit.

2007 Dec 22 02:23 PM