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Tremont: Q2 Inflows Fall to '01 Levels

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RYE, N.Y. (–The second quarter of 2005 saw the hedge fund industry recording its smallest net quarterly inflow of investor assets since the fourth quarter of 2001, according to research compiled by Tremont Capital Management Inc. All told, US$11.6 billion in assets were invested in hedge funds in the quarter, compared to a net allocation of US$24.6 billion for the first quarter of the year.

Bob Schulman, chief executive of Tremont Capital Management, attributed the slowdown to lower fund performance in the first quarter as well as “trendless markets.” However, he added, the flow for the second quarter is in keeping with historical industry growth rates.

Strategies attracting the most net assets were multi-strategy (US$6.3 billion), event-driven (US$3.9 billion) and fixed-income arbitrage (US$1.8 billion). Convertible arbitrage took the biggest lumps, with a net loss of US$2.9 billion, suffering net losses for the fourth consecutive quarter, while managed futures registered a net loss of slightly less than US$1 billion.

In a statement, Mr. Schulman said that investors have been attracted to the diverse portfolios of multi-strategy funds, while event-driven strategies have been popular because of the strong performance of distressed investing.

“Once again, we saw investors favor those strategies that tend to do best in difficult markets,” he said. “The outflows continued from convertible arbitrage even as that market seemed to be correcting itself from earlier levels.”

The Tremont Asset Flows Report, issued quarterly, is based on an asset base of approximately $735 billion in hedge fund allocations and represents an array of managers and funds located in the United States and overseas. Tremont estimates the global industry’s assets to be approximately US$1 trillion, with an additional US$325 billion estimated to be in privately managed accounts.

Tremont’s measure of new flows for the quarter was only slightly higher than that of Chicago-based Hedge Fund Research Inc., which issued a report in late July showing US$10.9 billion in new flows, up from the same period in 2004 but lower than the first quarter of 2005. The HFR data indicated capital moving into macro and energy funds while convertible arbitrage and relative-value arbitrage were losers, posting outflows of US$4.15 billion and US$200 million in assets, respectively.

Josh Rosenberg, president of Hedge Fund Research said he sees cautiousness among investors in hedge funds. “Clearly, market conditions have been mixed–it’s a difficult environment,” he said. “It was a difficult quarter, with poor performance early on and several high-profile fund closures, particularly in convertible arbitrage, and that likely led to lower flows into all assets.”

That said, it’s not yet time to sound the death knell for hedge funds. “From the data we collect on a day-to-day basis,” Mr. Rosenberg said, “I don’t think this is anything more than investors being cautious.”

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


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