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“Hedge fund managers exhibited caution in August and it served them well,” said Sol Waksman, founder and President of BarclayHedge. “The industry outperformed the market by a large margin. While the S&P 500 sank 4.7%, hedge funds posted a negative return of less than 1%.”

Hedge fund investors have grown hungrier for risk. Emerging Markets funds posted an inflow of $2.5 billion (1.3% of assets) in August following three straight monthly redemptions. Macro funds posted an inflow of $2.1 billion (2.3% of assets), the largest inflow since June 2008. Meanwhile, commodity trading advisors (CTAs) posted an inflow of $2.2 billion (1.0% of assets), the fifth straight inflow as well as the twelfth in 15 months. In contrast, funds of hedge funds redeemed $2.3 billion (0.4% of assets), the sixth outflow in nine months.

“We suspect hedge fund managers might invest aggressively in the current quarter,” said Vincent Deluard, Executive Vice President at TrimTabs. “The fresh cash flowing into the industry needs to be put to work. Further, about a third of managers are sitting on a year-to-date return of less than 1%, so they need to end the year with a bang in order to collect fat performance fees. Additionally, margin debt is relatively low and being able to borrow for virtually nothing provides a strong incentive to lever up.”

Like retail investors, hedge fund investors continue to flock to bonds. Fixed Income hedge funds posted an inflow of $2.3 billion (1.4% of assets) in August, the sixth inflow in seven months. Fixed Income funds boast a year-to-date return of more than 9%, far and away the best performance of any hedge fund strategy.

“We’re never keen on stepping in front of a speeding locomotive, but we are concerned about the $687 billion mom and pop have poured into bond mutual funds and ETFs since the start of 2009,” noted Deluard. “Given a 10-year Treasury yield of less than 2.5% and a two-year yield that rounds to zero, what will bond enthusiasts do when the piper demands to be paid?”

(press release)

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