Hedge Fund Inflows Up as Performance Sinks

Third-quarter performance was one of the worst in the industry’s history

Despite poor performance, hedge funds continued to see strong inflows in August, signaling investor aversion to traditional markets in a search for alternative sources of alpha.  

Reuters reports hedge funds took in $6.1 billion in August as the industry outperformed slumping markets.

“August marked the seventh month this year when inflows into the $2 trillion hedge fund industry exceeded redemptions,” according to the wire service. “Hedge funds took in $51 billion in the first eight months of the year.”

But as Forbes' Halah Touryalai notes, hedge fund performance overall just ended one of the worst quarters in history with losses across almost every strategy.

“According to Hedge Fund Research’s index, hedge funds suffered a decline of 2.9% in September bringing losses for the quarter to 5.5%,” Halah writes. “That performance made the third quarter of 2011 the fourth worst in the industry’s history following the third and fourth quarters of 2008 and the third quarter of 1998.”

So what gives?

"Recent inflows might owe in part to excellent relative performance," BarclayHedge president Sol Waksman told Reuters. "While the S&P 500 plunged 10.6% in the four months ended August, the Barclay Hedge Fund Index decreased only 5.6%."

Waksman also said that preliminary data for September showed hedge funds beat the S&P 500 again last month.

Fixed income hedge funds appear to be faring best, and risk-averse investors have piled into the funds in 2011. The fund class, which invests in securities like corporate bonds and Treasuries, has taken in $14.6 billion this year. Fixed income funds are also the best performing type of fund in 2011, returning 3.6%, BarclayHedge data show.

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