Hedge fund assets hit record $665B

Assets invested in hedge funds hit a record $665 billion at the end of the second quarter, fueled by stronger equity markets, according to new studies.

Hedge Fund Research Inc. in Chicago reports that while the total invested in hedge funds globally rose $47 billion in the second quarter, only $1.4 billion of that was net new cash flow. The balance was from market gains. HFR’s data come from its database of hedge fund performance and asset flows, which covers about 60% of managers. HFR estimated asset growth for the remaining 40%.

A separate poll by LJH Global Investments LLC of Naples, Fla., and Reuters Group PLC of London surveyed 64 U.S.-based hedge fund managers about the allocations of U.S. and international clients, and found that investors moved a net $1.2 billion into those managers’ hedge funds in the second quarter, down from the net $1.4 billion in the first quarter. International investors cut allocations to these managers’ hedge funds by 14% to $1.2 billion during the period.

Institutional investment in the hedge funds included in the LJH/ Reuters poll was $480 million in the second quarter, up from $353 million in the first quarter.

New cash flow from pension funds in the second quarter for this group of hedge funds, however, was $19 million in the second quarter, down from $100 million in the first three months of this year.

Investors appear to be ready to go back into improving equity markets, where long-only strategies beat riskier short-selling hedge fund investments, the poll concluded.

“There is a perception that hedge funds have underperformed, and when you have a big upward move, people will look more to `long-only’ investments,” says Suzanne Murphy, managing director of Acorn Partners in Ottawa, one of the survey’s participants.

Even within the hedge fund arena, investors strongly favored equity hedge funds, moving $714 million into those strategies in the second quarter, down from $879 million in the first quarter. By contrast, investors put nothing in convertible-arbitrage funds, after investing $88 million in such funds during the first quarter, according to the poll.

The past year’s flip-flop in hedge fund returns, compared with long-only equity index returns, explains why investors seem ready to jump back to traditional equity investment vehicles.

Mostly positive

For the three years through June 30, annualized returns of all but three of the 21 HFR hedge fund indexes were positive, and all significantly outpaced the dismal -11.2% return of the Standard & Poor’s 500 stock index.

For the 12 months through June 30, all but two of the HFR indexes (both with negative returns) beat the S&P 500 return of 0.2%. Returns of only two other HFR indexes were within even 1 percentage point of that return; most were significantly higher.

But over the first six months of 2003, only five HFR indexes beat the 11.8% return of the S&P 500. One matched it, and only one other index was within a percentage point of it.

Returns of most HFR indexes were significantly lower than that of the S&P 500 for the six months, particularly the HFR Short Selling index, which returned -9.9%, the only negative return among the hedge fund indexes.

For the second quarter, only the HFR Equity Non-Hedge index, with an 18.2% return, bested the 15.4% S&P 500 return, and most HFR indexes badly lagged it.