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Highlights:

Performance losses reduced total hedge fund assets, but investor flows were net positive in January; a positive sign for the industry. Aggregate industry performance was significantly better than broad equity markets.

• Total hedge fund assets decreased -0.14% to an estimated $2.038 trillion, performance losses were the main cause of the reduction.
• Investors allocated $4.51 billion to hedge funds in January, performance reduced assets by $7.27 billion resulting in total assets falling $2.76 billion during the month.
• Investor flows were positive in January for the eighth month in the last nine. There was a slight outflow in December due to year-end redemption trends.
• The Core Growth Rate (% increase in assets due solely to investor flows) was +0.22% in January.
• Hedge fund assets are still $900 billion below the peak set in Q2 2008.

Hedge fund performance was negative in January, but the average of all funds outperformed equity markets significantly. Poor returns from commodity and equity focused funds more than offset positive returns from funds focusing on fixed income and FX markets.

• The HFN Hedge Fund Aggregate Index was -0.81% in January 2010 after rising +19.43% in 2009.

Assets:

• Allocations to fixed income strategies were positive in January with mortgage related strategies having the highest core rate of growth.
• Investor flows caused net redemptions from equity and commodity focused funds.
• Global macro, fixed income arbitrage and distressed funds had the highest rate of inflows in January.
• Multi-strategy, CTA/managed futures and long/short equity all experienced net outflows in January.
• Emerging markets strategies had slight net inflows.

Performance:

Regional/Country Specific Exposure:
Funds investing in Japan produced the best average performance of any regional exposures in January. Funds investing in Russia and the Middle East/North Africa regions also produced positive returns to begin the year. Broad emerging market returns were down in January, led by funds investing in Brazil, then China and India. The HFN Emerging Markets Index was -0.91% in January.

HFN Japan Index:                    +1.76% in January, +5.76% in 2009

HFN Russia Index:                   +1.70% in January, +63.09% in 2009

HFN Middle East/North Africa Index: +1.08% in January, +22.20% in 2009

HFN Latin America Index:            -2.98% in January, +46.43% in 2009

HFN India Index:                    -3.11% in January, +52.09% in 2009

HFN China Index:                    -3.46% in January, +41.05% in 2009

HFN Brazil Index:                   -3.74% in January, +51.80% in 2009

HFN Emerging Markets Index:         -0.91% in January, +43.62% in 2009

Fixed Income (FI) Strategies
The average performance from fixed income focused strategies was +1.60% in January. Performance was led by mortgage related strategies and funds investing in distressed securities.

HFN Mortgages Index:              +3.09% in January, +57.01% in 2009

HFN Distressed Index:             +1.70% in January, +29.72% in 2009

HFN Fixed Income Arbitrage Index: +1.45% in January, +20.71% in 2009

Equity (EQ) Strategies
The average performance from equity focused strategies was -0.67% in January. Despite being down on average in January, long/short equity fund outperformance over the S&P 500 TR Index was the greatest in the last 11 months. Market neutral, short bias and small/micro cap strategies all produced positive aggregate returns.

HFN Short Bias Index:            +2.24% in January, -20.17% in 2009

HFN Market Neutral EQ Index:     +0.85% in January, +4.56% in 2009

HFN Long/Short Equity Index:     -1.11% in January, +21.87% in 2009

HFN Healthcare Sector Index:     -0.49% in January, +28.12% in 2009

HFN Energy Sector Index:         -0.87% in January, +40.71% in 2009

Commodity and Foreign Exchange (FX) Related Strategies
CTAs and commodity focused managers had a very difficult start to 2010. Sharp declines in energy and agricultural commodities’ prices appear to have caused losses across many portfolios.

Foreign Exchange focused funds:               +0.18% in January, +1.32% in 2009

Financial Futures focused funds:              -1.41% in January, +11.92% in 2009 

HFN CTA/Managed Futures Index:                -3.52% in January, +1.83% in 2009

Commodity ex-Financial Futures focused funds: -3.19% in January, +3.05% in 2009

Corporate website: www.hedgefund.net

- FG