Hedge Fund Growth Continues

Hedge funds pulled in $4.1 billion in net new capital in the second quarter of 2012. The growth in net new capital during the quarter is smaller than the approx. $16 billion net capital the industry attracted in the first quarter. The capital inflows were concentrated among large hedge funds that manage over $5 billion. This category of funds with over $5 billion in assets attracted over $11 billion in net new capital during the quarter. Funds with less than $5 billion under management experienced net outflow of approximately $6.9 billion. During the quarter, the investors showed a strong preference for less riskier assets and allocated greater portion of capital to funds with low exposure to global equity markets.

Despite the net new capital of $4.1 billion, total hedge fund capital decreased to $2.10 trillion from $2.13 trillion due to negative return of 2.7 percent by hedge funds during the quarter. Approximately 30 percent of all funds experienced inflows totaling $43.3 billion during the quarter, while 70 percent of all funds experienced net outflows of $39.2 billion. Among the various hedge funds, fixed income-based relative value arbitrage funds gained $10 billion in new cash in the second quarter, but equity hedging, which is the industry’s largest strategy area experienced a net redemption of $1.3 billion.

Growth In Net New Capital Slows

Data for the six month period show that the approximately $20 billion in net new capital in the first half of 2012 is only approximately one-third of the $62 billion in net inflows to hedge funds in the same period of 2011. Funds managed under relative value strategies scored the strongest gains of 4.2 percent during the first half of 2012. Total hedge fund capital in relative value strategies has reached $555 billion at the end of June, closely behind the $570 billion capital invested in equity hedging, which is the industry’s largest strategy area.

Fund Managers Cautious

Hedge funds, which were once thought of as vehicles to make money in any condition, have turned cautious and are reluctant to place aggressive big bets. The common reasons cited for adopting a ‘capital preservation first’ approach is Europe’s debt crisis, and weak economic growth in the US.

Pedro de Noronha, managing partner at the hedge fund Noster Capital says, “Not only are we going through a period that, seasonally, is not good to take risk, but the looming U.S. elections, U.S. fiscal cliff and U.S. debt ceiling renegotiations are keeping us on the defensive,” adding, “The risk is that we may underperform a rising, illiquid summer market. But the reward for taking a lot of risk in the months ahead is just not there. We prefer focusing on capital preservation and running a tight ship until we can foresee better fundamentals.”

Last year, during the seasonally light summer months, hedge funds lost 7.9% on average in just the four months period ending September.

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