Hedge funds get bloody nose despite $9.5bn of new cash

Date: Wednesday, July 21, 2010
Author: Helia Ebrahimi, Telegraph

The world's biggest hedge funds walked away with the lion's share of the industry's $9.5bn of net inflows despite a whipping from market volatility which hurt the sector in the second quarter of 2010.

Hedge funds with more than $5bn in assets under management saw $8.8bn of new cash out of the $9.5bn which flowed into the sector, according to data provider Hedge Fund Research.

Those larger firms now manage over 60pc of the $1.65 trillion of assets under management - down from $1.67 trillion in the preceding three months.

Capital inflows in the first half of the year totalled $23.2bn, only 20pc of the record inflows recorded in 2007. But despite the much needed fresh money from investors, hedge funds had a very tough ride as they battled against swinging markets.

The HFRI Fund Weighted Composite Index posted a decline of 2.5pc, offsetting first quarter gains.

In 2009 hedge funds drew praise for their strong performance but in the first half of this year hedge funds declined by 0.21pc, as gains in credit sensitive strategies such as event driven and arbitrage were offset by losses in equity hedge and macro funds.

Money continued to flow out of fund of hedge funds, which saw investors withdraw $2bn in the second quarter.

Because hedge funds fees are based on a "high water mark" system with each investor, many firms have seen their fees get drowned out as they struggle to out do previous highs - which is why new money is so important.

Many small firms have struggled to maintain their cost base under these conditions and many believe the industry's much anticipated cull is still due.

Meanwhile, GLG Partners saw its own net inflows jump $1.5bn in the past three months ahead of its proposed takeover by Man Group.

However, inflows were dragged down by performance losses of $1.5bn and a $725m currency hit. Total AUM dropped by 3.1pc from $23.7bn at the end of March 2010 to just under $23bn at the end of June.