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Hedge Fund Inflows Set Another Record

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RYE, N.Y. (–Hedge fund inflows set another record in the second quarter, the fifth time in a row quarterly inflows have topped the previous reporting period.

Hedge funds added US$43.3 billion in assets between April 1 and June 30, according to TASS Research,* besting the previous record of US$38.2 billion set in the first quarter of 2004. With the new inflows, the estimated size of the hedge fund industry has grown to US$870 billion, according to TASS Research, Rye, N.Y.

In the asset flow report, TASS officials said the inflows resulted from investors, including institutions and pension funds, increasingly including hedge funds in their portfolios as a means of diversification. “With hedge fund managers’ sound potential to produce absolute returns, capital has rapidly continued to pour into the hedge fund industry,” according to the report.

Investors have been seeking alternatives to poor equity market returns and low interest rates. Hedge fund performance has been flat so far in 2004, but on par with that of the Standard & Poor’s 500 stock index. The CSFB/Tremont Hedge Fund Index returned 2.93% year-to-date through June 30, compared with the S&P 500, which earned 3.44% during that same time period. The S&P 500′s monthly annualized standard deviation, however, was 15.5% during that time, while the monthly annualized standard deviation of the CSFB/Tremont Hedge Fund Index was 8.31%, according to TASS Research.

Not all hedge fund strategies tracked by the CSFB/Tremont index produced positive returns in the second quarter, but then that’s been the case previously, as well, and investors seem undeterred.

In particular, long/short equity managers have benefited, claiming the most asset growth in the second quarter, US$13.5 billion. It was the largest single-strategy inflow ever recorded by the TASS Asset Flow Report. Long/short equity funds comprise nearly one-third of all hedge fund assets as tracked by TASS Research.

Event driven funds pulled in nearly US$7.7 billion, and global macro funds saw inflows of US$6.3 billion, both new inflow records.

Various economic and market conditions have contributed to mediocre performance among many long/short equity managers, however according to the TASS report “investors see promise in this strategy due to the ability of managers to reduce long exposure in times of uncertainty, and refocus capital on short exposure.”

The record flows into global macro belied the difficulty managers in that sector had producing good returns in the second quarter. The strategy eked out a 0.67% return in the second quarter, but strong performance in the first quarter helped boost the year-to-date global macro return through June 30 to 4.35%. According to the TASS report, it was this first-quarter performance that investors were chasing with new inflows.

Convertible arbitrage inflows, at US$2.4 billion, were cut almost in half from the first quarter, due largely to widening credit spreads and a lack of equity volatility, according to the report. A large unnamed hedge fund also partially liquidated its convertible portfolio.

Despite being the worst-performing strategy in the second quarter with a negative 10.06% return, managed futures still managed to see more than US$3.1 billion in inflows. Again, this money was likely chasing the strong first-quarter performance, when managed futures managers earned 7.11%.

Fixed-income arbitrage funds saw inflows of US$2.7 billion; emerging markets funds US$1.8 billion; equity market neutral funds US$1.4 billion; “other” funds, which include multi-strategy funds and funds that don’t fit easily into any category, US$4.2 billion; and dedicated short bias funds US$165 million, according to the TASS report.

The TASS Research inflows were significantly higher than other inflow numbers reported last week, and paint a decidedly rosier picture of the hedge fund industry. Hedge Fund Research Inc., Chicago, said that after setting records the past four quarters, inflows it tracked slowed to US$7.5 billion in the second quarter. HFR officials attributed the slowdown in part to poor performance.

Robert I. Schulman, co-chief executive of Tremont Capital Management Inc., Rye, N.Y., said he believes the TASS data better reflects what’s going on in the industry.

“We believe they [HFR] are not getting sufficient data,” Mr. Schulman said. “We take a manager-by-manager approach, with no estimates or polling.”

*TASS Research is the information and research unit of Tremont Capital Management Inc., Rye, N.Y., which is a minority investor in and strategic partner of HedgeWorld.

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Contact Robert F. Keane with questions or comments at: [email protected].