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Hedge Funds Attract $16.5 Billion, Least Since 2005

Date: Tuesday, April 22, 2008
Author: Katherine Burton, Bloomberg

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Hedge funds attracted $16.5 billion of new cash in the first quarter, the smallest inflows since the end of 2005, as a credit drought, falling home prices and a U.S. economy on the brink of recession damped investor enthusiasm.

The drop in deposits followed a record 2007, when investors pumped $194 billion into the loosely regulated investment pools globally, according to a report today by Chicago-based Hedge Fund Research Inc. Industry assets rose 0.4 percent in the quarter to $1.88 trillion, the smallest increase in four years.

``The financial-market volatility which characterized the second half of 2007 accelerated in the first quarter of 2008, Kenneth Heinz, president of Hedge Fund Research, said in a statement.

Hedge funds fell an average of 3 percent in the first quarter, the worst start to a year in almost two decades, according to revised data compiled by Hedge Fund Research. At least a dozen funds, including those run by London-based Peloton Partners LLP and Stamford, Connecticut-based Sailfish Capital Partners LLC, have halted redemptions or liquidated holdings this year after losses or client withdrawals.

About $800 billion of hedge-fund assets are allocated through funds of funds, which farm out money to individual managers. That's about the same as at the end of 2007.

This quarter's inflows were the lowest in almost three years. In the fourth quarter of 2005, investors withdrew $824 million from hedge funds as average returns fell below 10 percent for the second straight year.

Distressed Opportunities

While most strategies lost money in the first quarter, some investors expect the current credit crisis will create opportunities for managers who trade distressed bonds and loans. Such funds attracted $8 billion in the quarter.

Investors allocated $8.2 billion to equity hedge funds, which bet on rising and falling stock prices. These funds lost 5.7 percent on average in the first quarter, compared with the 9.9 percent decline by the Standard & Poor's 500 Index. Relative-value strategies, which try to profit from price discrepancies between securities, attracted $6.5 billion.

The biggest outflows in the quarter were from funds that trade the securities of companies going through mergers, which lost a net $4 billion. Investors pulled $1 billion out of macro funds, which chase macroeconomic trends by trading stocks, bonds, currencies and commodities. The funds were the best performers in the first quarter, rising 4.7 percent.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net