Investors Pile Into Hedge Funds
Thursday, April 14, 2011

Hedge fund inflows amounted to USD34.9bn in February 2011, the heaviest inflow on record, according to BarclayHedge and TrimTabs Investment Research.

Industry assets now stand at USD1.73 trillion, the highest level since October 2008 and Sol Waksman, founder and President of BarclayHedge suggested that flows are following performance.

"The Barclay Hedge Fund Index posted an increase in each of the past seven months, and it didn’t hurt that February is historically the best month of the year for new hedge fund subscriptions. Meanwhile, public pension plans — many of which are underfunded — are devoting much more capital to the hedge fund space," Waksman observed.

However, BarclayHedge and TrimTabs warn that the record inflow in February might have a detrimental effect on hedge fund performance in the next year.

“Investors of all stripes tend to chase fat returns, and investment vehicles of all kinds tend to perform relatively poorly once everyone under the sun is enamored of them,” explains Vincent Deluard, Executive Vice President of Research at TrimTabs. “Inflows are historically heaviest when asset prices are dear, while some strategies constrain managers. There are only a handful of deals on which a merger arbitrage fund can capitalize.”

The increase in the Barclay Hedge Fund Index in the 12 months following an inflow in excess of USD25bn averages just 2.6%. In contrast, the average increase in returns in the 12 months prior to inflows of more than USD25bn is 14.2%.

According to the research, funds of hedge funds hauled in USD7.3bn (1.3% of assets) in February, the heaviest inflow since March 2008, while commodity trading advisors (CTAs) raked in USD7.5 bn (2.5% of assets), the heaviest inflow since June 2009. Meanwhile, hedge fund investors are exhibiting a stronger appetite for risk and all six equity hedge fund strategies received assets in February.

“Competitive currency depreciations, soaring commodity prices, disasters in Japan, revolution and war in the Middle East, and debt crises in Europe make for a tragic and bearish landscape,” notes Deluard. “Market participants nonetheless keep peppering equities with cash, and that might explain why market corrections have proven so shallow and brief.”