The first half of 2012 saw considerable gains in hedge fund asset allocations, with managers netting $20 billion in new cash. This growth in investment was weighted most heavily to the first quarter of the year, where hedge funds saw an injection of $16.3 billion, in comparison to a weaker second quarter where new funds only totalled $4.3 billion. The industry was managing approximately $2.1 trillion at June 30th.
Crain’s New York reported that investors have continued to be attracted to hedge funds despite returns that have lagged equity indexes in the first half of the year. Large hedge funds benefited the most from this renewed interest, attracting a total of $11 billion in the second quarter, while smaller funds actually saw redemptions of approximately $6.9 billion.
This weaker performance is actually reflected further in statistics that show approximately 70 percent of funds experienced net redemptions during the second quarter, while only 30 percent saw an net inflow of funds. This demonstrates a shift in interest from investors of smaller funds to those of larger funds. These larger funds may be perceived as being less risky and, in uncertain times, may be viewed as a safer haven for capital.
Most funds had positive performance in the first half of the year, averaging approximately 1.6 percent based on the MSCI Composite Hedge Fund Index. These positive returns however did not match equity market returns, where the S&P 500 achieved a 8.49 percent return in the first six months of 2012. Hedge funds tend not to promise returns in excess of the market, but rather aim to achieve steady positive returns over longer periods of time. This means that such funds can be ahead or behind equity indexes while maintaining their stated investment objectives.
Positive returns not telling the whole story
These statistics can be puzzling for job seekers that are interested in entering the hedge fund industry. The net positive flow of funds seems to be encouraging news, but it doesn’t represent the whole picture. Smaller funds are under great pressure, as they are seeing redemptions so far this year, which is often the case when equity returns are hot. Declines in the equity market, as we’ve seen so far in July, may encourage a shift back to hedge funds that offer more stable returns.
Larger funds are attracting capital, and opportunities may be available at such firms for talented individuals, but overall consolidation in the industry may result in fewer total openings. The outlook may not be as weak as the dark days of 2007 or 2008, but overall the industry needs to see much more widespread net inflows before opportunities become widely available.
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