Investors continued to allocate new capital to hedge funds despite the volatile performance environment in the second quarter of this year, as new allocations to the hedge fund industry totaled nearly USD30bn in the three months to the end of June.
According to data released on July 19 by Hedge Fund Research as part of its quarterly hedge fund industry report, inclusive of the USD32bn in inflows from the previous quarter, inflows in the first half of 2011 exceeded USD62bn, the strongest half-year total since the second half of 2007, when the industry saw USD75bn in inflows.
Second quarter inflows offset a modest performance-based asset decline, and extended the record level of capital invested in the global hedge fund industry to USD2.04 trillion, HFR said.
“Financial markets continue to be dominated by uncertainty and volatility, and investors are allocating to hedge funds, expecting and anticipating this uncertain environment to persist," commented Kenneth J. Heinz, President of HFR. "The many catalysts in this environment, including the European sovereign debt crisis, the debate surrounding the US debt ceiling, accelerating Asian inflation, fallout from bank stress tests, and mixed US employment and housing statistics, suggest risk is changing faster and more dynamically than ever before."
Investors strongly favoured Macro and Relative Value strategies in Q2, with these receiving over USD20bn of the new inflow, the report shows. However, in terms of performance, Macro and Relative Value were at opposing ends of spectrum in 2Q, with the HFRI Macro Index posting a decline of -1.7%, while the HFRI Relative Value Index gained 0.76%.
Investors also favoured systematic, quantitative strategies with those receiving USD10bn in new capital across various sub-strategies. Equity Hedge strategies experienced inflows of only USD1.7bn in new capital in 2Q, bringing the YTD inflow total for Equity Hedge to USD8.1bn, the lowest of the four main strategy groups. After experiencing an inflow of USD4.8bn in 1Q, Fund of Funds saw a net withdrawal of USD2.1bn in 2Q; the HFRI Fund of Funds Index declined by -1.2 % for the quarter.
The report shows that after several quarters of moderating concentration, 2Q saw a reversal of this trend with the industry’s largest funds experienced a proportional increase in the new capital flows. Approximately two-thirds of the 2Q inflow went to firms with greater than USD5bn in firm AUM; these funds manage approximately 62.4% of all industry capital. The overall percentage of funds which experienced inflows fell to 61% in 2Q from 71% in the prior quarter.
“Hedge fund investors are now more sophisticated than ever," observed Heinz, "and are allocating to areas such as Macro, Relative Value and various quantitative strategies in anticipation of opportunities to be created by transition, volatility and risk.”
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