Hedge Fund Assets Rise, Investors Sour On FoFs

Jul 10 2009 | 11:49am ET

After a year of nonstop outflows, hedge fund assets actually rose 5.8% in May as investors finally began coming back. Of the increase, 1% was attributable to net inflows and 4.8% attributable to returns, according to Hedgefund.net data published by Standard & Poor's Fund Services.

“Based on returns achieved by fund of hedge funds rated by S&P Fund Services, we estimate that returns in the second quarter have been around 5%, with 6% achieved over the year to date,” said S&P Fund Services lead analyst Randal Goldsmith.

Across the underlying hedge fund strategies each individual strategy delivered a positive return in May apart from short biased. Distressed strategies had their best month for over 18 years, returning 6.1%. Emerging market hedge fund performance was the strongest strategy in May (up 10.2%) which was among the five best months on record.

Funds of funds were slow to catch the turn in March after reducing net and gross exposures to historically low levels. “Gross exposures remain low, but we have noticed net exposures within long-short equity hedge allocations moving up significantly,” said Goldsmith.

Investors who were quick to respond to disappointing returns have been much slower to react to improving performance. Goldsmith said the primary reason for this is investor disappointment over the management of portfolio liquidity by hedge funds and funds of funds. He also added that funds of funds that have restricted investor liquidity have a lot of work to do on their process and structure.

During the past 12 months, the vast majority of fund of funds rating actions have been negative. S&P Fund Services ratings have been taken away from over 10% of funds of funds for poor liquidity management (the firm does not rate a fund that has over 20% of the portfolio in a side-pocket or where dealings are suspended) or weaknesses in their risk management processes related to exposure to Madoff strategies.


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