Q2 Inflows Huge Amid So-So Performance

CHICAGO (HedgeWorld.com)--Hedge funds brought in $42.1 billion in new assets in the second quarter, according to numbers released Thursday by Hedge Fund Research Inc. It was the largest single-quarter inflow HFR has seen since it began tracking asset flow figures in 2003.

The new assets brought the estimated size of the hedge fund industry to $1.225 trillion, HFR said.

"As the data shows, this was an extremely impressive quarter for hedge funds from an asset flow perspective," said Joshua Rosenberg, president of HFR, in a statement. "Nearly all strategies saw positive flows as investors continued to demonstrate their confidence in the industry."

Equity hedge strategies were the biggest gainers, according to HFR's figures, taking in more than $13 billion in new assets. Macro funds took in $8.4 billion, while event-driven strategies collected $4.8 billion in new money. Convertible arbitrage managers, who are performing well so far in 2006 with a 6.29% return through the end of June, saw inflows of $3.3 billion. Merger arbitrage managers were up 2.09% in the second quarter and are up 8.59% for the year, so the fact that they attracted some $3.6 billion in new assets isn't too surprising.

Flows of assets into funds of funds increased, too, with the multi-fund managers collecting $15.6 billion, more than double the $6.4 billion they took in during the first quarter.

On the downside, fixed-income arbitrage saw outflows of $164 million.

Performance-wise, the second quarter was mediocre. The HFRI Composite Index rose just 0.17% after gaining nearly 6% in the first quarter, according to HFR. For the year the index is up 6.16%, compared to the Standard & Poor's 500 stock index, which is up 2.71% for the year, and the Morgan Stanley Capital International World Index, which is up 4.95%.

Short sellers led all strategies in the second quarter with a 4.17% return. Short specialists are up 2.3% so far in 2006. Distressed securities gained 2.81% in the second quarter and are up 8.22% for the year.

Equity non-hedge managers led decliners, losing 2.94% in the quarter. For the year the strategy is up 5.07%. Emerging markets managers are up 9.65% thus far in 2006, but the second quarter didn't help them much; they lost 0.47% in the April through June period, according to HFR. Asian specialists were down 1.95%, global managers lost 0.54% and Latin American managers, who had been shooting the lights out earlier this year, fell 0.39%. Only Eastern Europe/CIS managers were positive, gaining 2.07% in the second quarter.

Funds of funds lost 0.76% in the quarter and are up 4.19% for the year.

"We have seen historically that flows tend to follow performance, and the first quarter of 2006, along with the first part of the second quarter, was one of the strongest the industry has experienced for several years," Mr. Rosenberg said.

CClair@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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