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Inflows in hedge funds set to exceed outflows

Date: Monday, April 27, 2009
Author: Shveta Pathak, Business 24-7

Slowing redemptions in hedge funds have ignited hopes of inflows exceeding the outflows by the end of this year, said industry analysts. Increased transparency has become a key focus with many funds due to slip in investor confidence and many are hoping that tighter regulations and higher transparency would help bring investor confidence back soon.

A recent study by Hedge Fund Research said investors pulled $103 billion (Dh378bn) out of hedge funds in the first quarter of 2009. Even as it shrunk the size of the asset class to an estimated $1.3 trillion, the redemptions were lesser compared to $152bn witnessed in the last quarter of 2008, the research said.

This has led to hopes that the worst would be over by the first half of this year for hedge funds, that were once a much sought asset class.

"Now that we are nearly at the bottom of the current crisis and beginning to see increasing reports of optimistic financial news, redemptions are slowing. Our three funds have already starting to see new inflows," John J Papesh from Pharos Financial Group, told Emirates Business, adding: "Though it may be tough to predict with precision the global trend, we may expect by the last quarter of this year that inflows outnumber redemptions."

The sector underwent major shocks as investors withdrew heavily last year due to poor performance by many funds. As per estimates, more than 1,500 funds saw closures, with more than half of those happening in the fourth quarter. The sector is estimated to have shrunk by more than 40 per cent from its asset level peak in June, according to reports. Trend reversal in terms of slowdown in redemptions has started to bring glimmers of hope for the asset class.

Another research, conducted by hedgefund.net recently, said that net investor redemptions and liquidations continued to decline every month in the first quarter. As per the report, net redemptions and liquidations were $23.97bn compared to investor outflows of $41.14bn in February and $165.25bn in January this year.

The fall in hedge fund assets, according to hedgefund.net, was 1.01 per cent in March to $1.724trn compared to reductions of 2.51 per cent in February and 7.56 per cent in January this year. As the sentiment grows positive, the consensus that outflows would bottom by the first half is growing.

However, factors like performance of hedge funds and global economic situation would play a crucial role in determining the fate of the sector, said those in the industry.

"A more supportive global backdrop, hedge funds putting up positive risk adjusted returns would be among the key variables that would determine how inflows are in coming months," said Jeffrey Meyers, Head of Macro Sales with Newedge.

In the region, inflows into sovereign wealth funds too would be critical, said industry analysts.

"Higher oil prices which will create inflows of cash into SWFs that are one of the premier hedge fund investors, too need to be looked out for," he said