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Hedge funds lost $66.87bn in May but investor inflows remain positive at $2.13bn – HFN

Tuesday, June 29, 2010
Opalesque Industry Update - The hedge fund industry lost $66.87bn of its assets from negative performance in May but net investor flows were positive for the fifth month in a row, as they put in $2.13bn, according to’s latest Industry Overview. Total industry assets fell -2.82% (est.) to $2.234tn. The core rate of growth was an increase of 0.09%.

According to the report, the HFN Hedge Fund Aggregate Index of 3,466 hedge funds was down 2.86% for the month and +0.89% YTD. Comparatively, the S&P 500 Total Return Index was -7.99% and -1.51% YTD.

Peter Laurelli, vice president of New York-based Channel Capital Group and HFN said: “May performance was a sharp reversal from April and was highly influenced by falling equity markets. Global equity market declines were highlighted by the ‘flash crash’ early in the month, however indices had already begun a steady fall at the start of the month and ended lower.”

Laurelli added that the May results also highlighted the fact that many fund managers had already positioned their strategies cautiously, which was shown in the wide gap between the negative returns of the S&P and those of hedge fund indices.

U.S. hedge funds with highest inflow despite crackdown
Surprisingly, U.S. based funds reported above average net inflows last month, HFN data showed. This was despite efforts by U.S. lawmakers to pass a thorny comprehensive financial overhaul bill that may hurt hedge funds and banks.

U.S. House and Senate negotiators approved early on Friday legislations that redefine federal oversight of the financial industry; the package includes leverage limits and auditing rules for banks and the Volcker rule. The reconciled bill will have to be approved by both the House and Senate, with a vote scheduled in the House for today. Leaders on Capitol Hill expect a final bill to be approved by Congress and sent to President Obama for his signature before July 4, reported Market Watch.

Also, there are some senators who have softened their stance and are now thinking of giving some exemptions to banks to allow them to retain some investments in hedge and private equity firms.

Another issue that is hounding hedge funds and private equity firms in the U.S. is the proposed hike of the “carried interest tax.” But the proposal failed to generate the support of 60 senators, which forced Republican Senator and Majority Leader Harry Reid to declare that the carried interest tax was dead and the Senate will move on to other business.

However, New York Governor David Paterson, with the backing of some New York lawmakers, proposed to impose carried interest tax on people who work for hedge funds in the state even if they live elsewhere, in an effort to raise $50m per year.

Europe with highest outflows
On a regional basis, funds in Europe were responsible for all net outflows in May, the HFN report added.

“This is not a surprise given the heightened uncertainty around many euro-zone economies,” Laurelli emphasized.

Some European Union nations have recently pushed for deep deficit cuts to restore market confidence in the EU and its ability to manage the debt crisis. EU Economy Commissioner Olli Rehn said investors worry that the EU would not be able to reduce its mounting debt despite the $1tln rescue package earlier approved by the ECB.

But Swiss banking group SYZ & Co., in its Point of View newsletter in May, said that while the ECB was correct in issuing the $1tln bailout package as it was expected to strengthen Europe’s Monetary Union, it would weaken the region’s growth in the shorter term. It added that Germany would emerge as the biggest winner in the on-going European financial crisis (See Opalesque Exclusive: here).

Emerging markets fared better
Emerging market debt-focused strategies performed well in May. The HFN Emerging Markets Index was down 5.73% in May, +0.75% YTD.

Funds investing in Brazilian bonds showed the most resiliency, falling only 0.56%, while the Latin American debt strategies outside of Brazil had a more difficult month, but continue to be strongly influenced by volatile returns from funds investing in distressed Argentine debt markets. Eastern European bond strategies performed significantly better than their equity market peers, but were down 3.72% on average.

This was in accordance with the assessment made by Morgan Stanley during the month when it said that emerging markets and Asian shares offer "significant value" after Europe's sovereign-debt crisis prompted a selloff.

Templeton Asset Management Ltd’s Mark Mobius also said that emerging markets bonds and stocks were “safer” for investors. He said that developing markets offer lower debt to gross domestic product ratios, higher foreign currency reserves and better managed banks compared with their developed counterparts.

The same sentiment was given by Eric Fine, Portfolio Manager of the emerging markets macro G175 Strategy at Van Eck Absolute Return Advisers Corp., which manages $22bn in AuM including $3bn in emerging market focused funds. Fine said that emerging markets continue to offer opportunity (See Opalesque Exclusive: here).

Last week, a world wealth report prepared by Merrill Lynch-Capmegimini showed that wealthy investors are looking into emerging markets to invest in high-yielding large company stocks, after cautiously dipping their toes back into the financial markets since last year. Source
-Precy Dumlao

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