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Hedge Fund Sector Encounters Headwinds in Second Quarter 2004


Date: Thursday, August 5, 2004


Hedge Fund Research, Inc. MacMillan Communications: Joshua Rosenberg, Andrew Schiff, Chicago/312-628-0319 New York/212-473-4442... Negative One Per Cent Quarterly Sector-wide Performance of HFRI Composite Index Represents First Retreat in Six Quarters. After Five Strong Quarters Asset Inflows Slow Considerably. In Q2 Distressed Securities and Mortgage-Backed strategies lead the pack; Macro and Emerging Markets strategies experience reversals of fortune. CHICAGO— August 5, 2004— Hedge Fund Research, Inc. (HFR), the leading source of Hedge Fund information and performance data, today released its analysis of the hedge fund industry for second quarter 2004. In its first quarterly decline since a negative 3.9% drop in Q3 2002, the HFRI Fund Weighted Composite Index, which measures performance across all hedge fund sectors, averaged negative 1.0% performance on the quarter. In addition, after four quarters in which asset inflows averaged nearly $21.2 billion per quarter, and never dipped below $19.6 billion, Q2 total inflows slowed to $7.5 billion. Combining these inflows with the slightly negative quarterly performance resulted in hedge fund assets under management increasing slightly to $865.9 billion, up from $864.7 billion at the end of Q1. According to HFR, these results can be seen as modestly benign when considering the confluence of market conditions during the quarter that were particularly adverse to the many hedge fund investment strategies. Despite an overall decline in performance during the second quarter, the HFRI Fund Weighted Composite still measures 2.7 percent year to date while total asset flow into the Industry stands at $30 billion. Hedge Fund Research/Page 2 “Less-than-ideal trading conditions for hedge funds were characterized by sudden reversals in market trends and low levels of pricing differentiation between assets,” said Joshua Rosenberg, president of HFR. “With the majority of asset classes moving in a highly correlated fashion during the quarter, and in an environment of historically lowlevels of volatility, it was difficult for hedge funds to find pockets of opportunity. Given the difficulty of these market conditions, we take it as a good sign that the industry only gave up one per cent.” Top Category Stories for 2003: A close examination in the data available in the Q2 2004 HFR report reveals a number of interesting trends from across the 19 distinct categories of hedge funds that HFR tracks. Please note that all performance figures are based upon the HFRI Monthly Performance Indices. The $39 billion Distressed Securities category, lead all hedge fund categories in the quarter, notching a 3.2 percent return in Q2. Year to date, the category is up 8.2 percent, also leading all others. HFR attributes these results to the singularly strong quarterly performance of high yield bonds that were somewhat more immune from the interest rate risk affecting the investment grade debt market. The $23 billion Fixed Income: Mortgage Backed Securities category posted more solid results, up 1.8 percent on the quarter and 5.2 percent so far this year. Based on the continued health of the mortgage industry, this category has now notched seven consecutive quarters of positive growth, and has had only had one negative quarter since Q3 of 2000. The $105 billion Macro category, which makes leveraged bets on anticipated price movements of stock markets, interest rates, foreign exchange and physical commodities, saw a performance return of negative 3.3%, its first down quarter since Q3 2000. Despite the loss, the category is still up 0.34 per cent year-to-date. The category also saw a notable cooling of asset flows, with only $42 million in new money for the quarter, bringing year-to-date inflows to $3.5 billion. This represents a significant decline from the hefty 2003 pace, which saw just over $28 billion of inflows into the strategy. The $25.4 billion Emerging Markets sector, which invests in foreign securities or the sovereign debt of developing countries, saw a steep 5.0 percent decline in Q2, its first quarterly decline since Q3 2002. The performance, which HFR attributes to the cooling of the Chinese economy and the market turbulence caused by Indian elections, represents a sharp reversal of the 39.4 per cent performance gain achieved in all of 2003 and the strong 9.7 per cent gain in Q1 2004. Hedge Fund Research/Page 3. # # # # The HFR Second Quarter 2004 Industry Report contains more than 120 pages of charts and graphs provided in both PowerPoint and Adobe Acrobat formats. For more information on the Report or on HFRI Indices, please visit www.hedgefundresearch.com. About HFR: Chicago-based HFR Group L.L.C, founded in 1993, is one of the global leaders in hedge fund data, research, indexation and asset management. The HFR Group companies include Hedge Fund Research, Inc., and HFR Asset Management L.L.C. Hedge Fund Research produces HFR Database, considered to be the definitive source of hedge fund performance and information. HFR also distributes the HFRI Monthly Performance Indices–the premier benchmarks for the hedge fund industry. With $3 billion in assets under management, HFR Asset Management offers a range of hedge fund investment products: Investable Indices, Funds of Funds, single-manager funds and customized multi-manager funds.