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Despite these figures, if inflows continue at their current pace through the end of the year, 2012 would have the lowest inflow total since 2009, when investors withdrew $131 billion from the hedge fund industry.

The HFRI Fund Weighted Composite Index gained three percent in 3Q12, creating a performance-based asset increase of approximately $70 billion.

Investors continued to exhibit a strong preference for Fixed Income-based Relative Value Arbitrage (RVA) strategies, while reversing prior quarter outflows to Macro/CTA strategies. The HFRI Relative Value Index has gained 7.9 percent YTD through 3Q, leading all hedge fund strategies; the HFRI Relative Value: Asset Backed Index has gained 13 percent YTD. Investors allocated $12.6 billion of new capital to RVA strategies bringing RVA inflows to $35 billion YTD and total capital in RVA to $586 billion, which is essentially even with Equity Hedge for the largest strategy area by assets. Macro hedge funds saw an inflow of $4.4 billion, with $4.8 billion allocated to quantitative, trend following Systematic Diversified (CTA) strategies, which trade across currency, commodities, equities and fixed income exposures globally. Macro strategies have posted a narrow gain of +0.7 percent YTD, while CTA strategies are essentially flat for the year, despite a gain of +0.9 percent in 3Q.

Continuing trends from the previous three quarters, investors withdrew capital from both Equity Hedge and Event Driven strategies in 3Q12, with these experiencing $5.2 and $1.3 billion in net redemptions, respectively. The HFRI Equity Hedge and Event Driven Indices have gained +5.5 and +5.0 percent, respectively, YTD through 3Q, with total capital invested in these reaching $586 billion and $536 billion, respectively.

Capital turnover was modest in 3Q, with few funds experiencing inflows or outflows greater than $500 million; 41 percent of all funds experienced inflows for the quarter. In addition, 43 percent of all hedge funds have reached their high watermarks in the trailing 12 months, while gross 3Q inflows totaled $38 billion. Also continuing the trend from prior quarters, investors exhibited a strong preference for established firms, with $13 billion of 3Q inflows concentrated in firms with greater than $5 billion in AUM. Through the first three quarters of the year, $43 billion of the $31 billion YTD inflows have been allocated to the industry’s largest firms. Investors continued to withdraw capital from Fund of Hedge Funds, which experienced $4.4 billion in 3Q outflows, the 6th consecutive quarter of outflows. Total capital invested in Fund of Funds increased to $635 billion, as the HFRI Fund of Funds Composite Index gained +2.4 percent for the quarter.

“Risk-off sentiment dominated financial market and hedge fund performance in 3Q, with investors responding to continued global stimulus efforts and the evolution of risk in the European debt and banking crisis, with steady allocations driving assets to a record level,” stated Kenneth J. Heinz, President of HFR. “Shifting and uncertain macro and structural risk dynamics have motivated investors to allocate to hedge funds not only to mitigate excessive equity market volatility, but as a tactical mechanism to enhance portfolio fixed income yields and capture powerful trends across currency and commodity markets. Hedge fund investors are likely to benefit from the continuation and development of these trends in coming quarters.”

Press release

HFR (Hedge Fund Research, Inc.) is the global leader in the alternative investment industry, specializing in the indexation and analysis of hedge funds. Established in 1992, HFR produces the HFRX and HFRI Indices, the industry’s most widely used benchmarks of global hedge fund performance. www.hedgefundresearch.com

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