Hedge Fund Inflows Continued in September, FoHFs Faced Pressure

Date: Friday, October 26, 2012
Author: Peter Laurelli, HedgeFund.net

The trend to direct investment a benefit to credit and macro funds, equity and emerging markets faced redemptions in Q3

Hedge fund assets rose in September for the third consecutive month to reach $2.587 trillion. Investors added an estimated $8.3 billion in September and $18.5 billion in Q3. The YTD core growth rate of 1.6% lags that of the same period for 2011 and 2010 when the industry grew 2.0% and 2.2%, respectively, from net investor flows. Performance gains added nearly $70 billion during the quarter.
At the current rate of growth, hedge fund industry assets may reach a new peak in 2013, however there are structural headwinds. From peak to trough (Jul 08 to Apr 09), industry AUM fell 42%. From that low, a 71% increase was required to reach a new high. Since Apr 09 to Sep 12, the industry has grown 51%, (asset weighted performance of 33% and core growth of 17%), a $872 billion rise, $587 billion due to performance and $285 billion in net investor inflows.
The primary weight keeping hedge fund assets from rising more quickly is redemptions from funds of funds (FoF). FoFs had net outflows in Q3 of $13.6 billion, the fifth consecutive quarter of net investor redemptions.
Fund of funds outflows in the face of hedge fund inflows signal the long term trend of rising institutional investor preference to investing directly in hedge funds. However, the decline in equity and emerging markets hedge fund strategy assets in 2012, while these sectors continue to grow in the traditional space, is evidence institutional investors are more actively comparing traditional and alternative exposures during this shift out of funds of funds, and some cases may prefer traditional managers for certain exposures.
One area within the hedge fund industry where assets reached a new peak in Q3 is funds targeting credit markets. The sector took in an estimated $11.0 billion in September and $30 billion in Q3. Performance has been very positive and added an additional $32.5 billion during the quarter lifting total AUM to $779.2 billion.
The inflows into credit, macro and other arbitrage related strategies in 2012 is evidence institutional investors are seeking truly alternative types of exposures, or specialized market expertise, from their hedge fund allocations.

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