The third quarter was one of the worst ever for the hedge fund industry, with poor performance accounting for approximately $85 billion in losses, according to new data from HFR.
Uncertainty regarding the European sovereign debt crisis and weakening economic data contributed to volatility across equity, credit, commodities and currencies, resulting in the fourth worst quarterly performance in industry history.
The HFRI Fund Weighted Composite Index declined by -6.2% for the quarter, wiping out a small first half gain and bringing year-to-date performance for the broad based composite to -5.4%.
Despite performance based declines, investors continued to allocate new capital to the hedge fund industry, with 3Q net inflows totaling $8.7 billion. This marks the ninth consecutive quarter in which the industry has experienced net inflows from investors and brings the YTD inflow total to $70.1 billion.
According to HFR, investors exhibited preferences for certain strategies, allocating $8.5 billion of new capital to relative value arbitrage funds, bringing YTD inflows in relative value to over $30 billion.
Macro funds experienced a net outflow of $3 billion, despite posting a narrow performance gain of 0.6% in 3Q. However, macro has been in favor with investors throughout 2011, with nearly $20 billion of inflows YTD. In contrast, equity hedge funds, which comprise nearly 30% of all industry capital, experienced $2.7 billion in net inflows for the quarter, despite posting a performance decline of -10.4%.
Credit-sensitive event driven funds, which declined by -7.3% in the quarter, experienced a net inflow of less than $500 million; Event driven funds have received less than $10 billion in new capital in the first three quarters of 2011, the lowest by strategy area.
In total, 61% of all hedge funds experienced outflows for the quarter, while 39% experienced inflows. Of these, approximately 20 funds experienced inflows of greater than $500 million in 3Q, while nearly 25 funds experienced outflows of greater than $500 million.
“The third quarter presented an extremely challenging performance environment, with asset volatility in many respects on par with financial crises in 2008 and 1998,” said Kenneth Heinz, president of HFR. “However, as investor risk aversion increased across all asset classes, hedge fund investors have maintained a critical but forward-looking disposition, reinforcing their commitments to preferred strategy areas and core funds, and positioning their allocations to benefit from opportunities created by current dislocations and volatility.”