Hedge Funds Attracted $58.7 Billion in Second Quarter (Update2)

Date: Tuesday, July 24, 2007
Author: Jenny Strasburg and Katherine Burton, Bloomberg

July 23 (Bloomberg) -- Hedge funds had their second-best fund-raising quarter, attracting $58.7 billion globally from investors, even as losses in subprime-mortgage loans forced managers including Bear Stearns Cos. to close funds.

Macro-fund managers had the biggest percentage gain in new assets, more than tripling to $6.9 billion, according to a statement today by Chicago-based Hedge Fund Research Inc. The industry now oversees $1.74 trillion, a 22 percent increase from the end of 2006.

Two hedge funds managed by New York-based Bear Stearns lost almost all their assets when subprime-mortgage values plummeted, the securities firm told investors this month. The average fund worldwide returned 7.7 percent in the first half of 2007, beating the 6.9 percent gain including dividends of the Standard & Poor's 500 Index, a benchmark for U.S. stocks.

``Subprime-mortgage exposure has not yet resulted in a generalized, systemic impact on indexes of credit-focused hedge funds or on the broader hedge-fund universe,'' Kenneth Heinz, Hedge Fund Research president, said in the statement. ``Specific instances of weakness are at least partially offset by the performance of funds which have minimized their exposure to subprime mortgage credit or, in some instances, maintained short exposure to many of these securities.''

The Paulson Credit Opportunities Fund soared 129 percent this year through June 30, according to a July 5 letter to the New York-based firm's investors. Paulson & Co., the fund's manager, predicted that home loans to U.S. borrowers with poor credit histories would drop in value as defaults increased.

Money Follows Returns

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested. They strive to make money even when financial markets fall.

Managers have posted gains in 11 straight months, following declines in May through July 2006. Hedge funds returned 0.89 percent return in June when the Standard & Poor's 500, fell 1.66 percent. First-quarter sales were a record $60 billion.

``Hedge-fund flows follow performance and hedge-fund performance has been excellent,'' Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds, said in an interview.

Subprime-Market Problems

Braddock Financial Corp. of Denver said July 5 it plans to liquidate its Galena Street hedge fund after halting redemptions from the $300 million pool. Subprime mortgage defaults caused losses that led to withdrawal requests for more than 60 percent of the fund's assets, Harvey Allon, the firm's chief executive officer, said in an interview.

John Devaney of United Capital Markets Holdings Inc., halted redemptions this month in some of his Horizon hedge funds invested in subprime mortgage bonds to avoid dumping holdings at a discount. The Key Biscayne, Florida-based firm had $620 million under management in its Horizon group of funds as of March 31, according to client letters.

Inflows to macro managers, who bet on stocks, bonds, currencies and commodities worldwide, came as they returned 5.83 percent year-to-date through June.

``Macro funds tend to attract money when there are big macro moves,'' Barth said, pointing to a fall in the dollar and a rise in interest rates.

The Euro gained 2.58 percent against the U.S. dollar in the first half of 2007, and the British pound gained 2.5 percent. Yields on the 10-year U.S. Treasury note gained almost 18 percent to reach 5.29 percent in mid-June, after dropping to 4.49 percent on March 7, the lowest since January 2006.

Institutions Step Up

Relative-value arbitrage managers, who try to take advantage of price differences between securities, brought in $16.4 billion in new money last quarter, an increase from $10.3 billion in the first quarter and the most of any strategy. The relative-value category includes multistrategy credit funds vulnerable to worries about declining values of mortgages made to homebuyers with poor credit.

Endowments and retirement-plan managers could triple their hedge-fund investments to more than $1 trillion by 2010 as these institutional investors seek better returns, according to an October 2006 study by Bank of New York Co. and Darien, Connecticut consulting firm Casey, Quirk and Associates LLC.

``The worry is that investors are putting money into hedge- fund strategies thinking they'll be different from other markets, then find out they're not that different,'' said John Godden, head of London-based IGS Group, which invests in hedge funds for pension-fund managers and other institutional investors.

To contact the reporters on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net ; Katherine Burton in New York at kburton@bloomberg.net .