Hedge fund investment slows in wake of market volatility

New investment in hedge funds slowed markedly in the first quarter, as market volatility and the fallout from the US credit crisis took a significant toll on the amount of money flowing into the industry.

Just $16.5bn in new capital came into the hedge fund market over the course of the volatile first quarter, according to Hedge Fund Research (HFR). The hedge fund industry data provider said it was the lowest amount since the fourth quarter of 2005.

Total capital under management was virtually unchanged at $1,875bn, compared to $1,868bn at the end of last year, representing the smallest quarterly increase in assets since the second quarter of 2004.

The slow start to 2008 comes after investors last year allocated a record $194bn in new capital to the industry in spite of the US credit crisis and wider concerns about the US economy.

However, selected strategies still proved attractive to investors seeking to take advantage of, or hedge against, market conditions.

For example, investors allocated more than $8.2bn in new capital to equity hedge fund strategies, which nonetheless saw total assets under management decline on weak performance.

Funds that attempt to find opportunities in distressed credit saw significant positive flows, with distressed and special situations strategies attracting nearly $8bn in new funds.

Investors redeemed nearly $1bn from macro strategies, while investors reduced capital in merger arbitrage strategies by more than $4bn.

Macro strategies were the top performers in the first quarter with the HFRI Macro Index gaining more than 4.7 per cent.

Other strategies turning in solid performances during the period included short- selling hedge funds, which posted investment returns of 7.5 per cent.

Both credit and equity strategies turned in weak performances in the first quarter with equity hedge falling 5.7 per cent, and most arbitrage strategies declining between 4 and 5 per cent, according to HFR.

While several established funds liquidated in the first quarter of 2008, investors also continued to allocate despite market volatility, with the 50 largest outflows combined totalling more than $32bn, while the 50 top inflows totalled more than $46bn.