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Highlights:

1) Hedge funds returned +2.74% in September. Performance through first three quarters of 2009 is the best in 12 years. HFN Hedge Fund Aggregate Index is +16.76% in 2009.

2) Total hedge fund assets rose +2.98% in September to $1.948 trillion. Investor allocations were positive for the 5th straight month as an estimated $7.02 billion was allocated in September.

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Details from September and Q3 2009:

Assets:

SEPTEMBER 2009

- Total assets rose 2.98% in September to $1.948 trillion, a monthly increase of $56.4 billion.
Performance accounted for the vast majority of the increase, $49.4 billion and investor allocations accounted for an additional $7.02 billion of the total asset rise.

- Net investor flows were positive for the 5th straight month.
Net investor outflows ended in April 2009. September marks the fifth straight month of net inflows, during which investor allocations have added an estimated $75.1 billion to total asset growth. The rate of organic growth (asset rise due to investor allocations) appears to have decreased in September to 0.37%, nearly matching rates seen in July.

Q3 2009

- Total assets rose 8.73% in Q3 2009 to $1.948 trillion, a quarterly increase of $156.4 billion.
Performance accounted for $116.04 billion and investor allocations accounted for an additional $40.4 billion of the total asset rise.

- Quarterly Investor flows in Q3 were net positive for the first time since Q2 2008.
The financial crisis had turned net hedge fund investor flows negative for four straight quarters. Despite positive flows in May and June 2009, outflows in April kept Q2 flows negative. Q3 2009 was the first positive quarter in the last five.

WHERE WERE HEDGE FUND INVESTORS MOST ACTIVE IN Q3 2009?

- Notable investor inflows by Market:

1) Commodity focused funds: Investor allocations increased commodity fund assets by over 9% in Q3 2009
2) Mortgage bond focused funds: Allocations increased assets 5.8% in Q3 2009
3) Corporate bond focused funds: Allocations increased assets 5.5% in Q3 2009
4) Equity related strategies: Allocations increased asset by 3.7% in Q3 2009

- Notable investor inflows by Primary Strategy:

1) Statistical Arbitrage: Allocations increased assets 12.6% in Q3 2009
2) Event Driven: Allocations increased assets 8.4% in Q3 2009
3) CTA/Managed Futures: Allocations increased assets 3.8% in Q3 2009
4) Long/Short Equity: Allocations increased assets 3.0% in Q3 2009
5) Distressed: Allocations increased assets 2.8% in Q3 2009

- Notable areas of lagging inflows or outflows:

1) Long Only strategies: Investor redemptions reduced assets 4.2% in Q3 2009.
2) Eastern Europe: Investor redemptions reduced assets 5.8% in Q3 2009, primarily due to outflows in July. Flows in August and September were positive.
3) Energy Sector: Investor redemptions reduced assets 1.7% in Q3 2009. Here too, flow trends turned positive in August and September.
4) Multi-Strategy: Flows have been mixed, with redemptions slightly outpacing new allocations in Q3. Investors appear more comfortable allocating directly to more focused strategies.
5) Convertible Arbitrage: Despite positive performance, investor allocations have not been strong enough to outpace redemptions in Q3.

Performance:

September performance was positive for the seventh straight month; the longest streak of positive performance since July 2007, the final month of a twelve month positive run. Positive performance was driven by emerging markets and equity focused strategies, but distressed and fixed income arbitrage related funds continue to produce near record results.

The HFN Hedge Fund Aggregate Index was +2.74% in September and +16.74% in 2009; the best returns through Q3 since 1997.

Regional/Country Specific Exposure:
Emerging market hedge fund performance was strongly positive in September. The HFN Emerging Markets Index was +6.86% in September and +36.96% in 2009. Funds investing in Russia led the emerging market surge in September followed by Latin America and India. China focused funds lagged in September, but were still positive on average.

Fixed Income (FI) Strategies
The average performance from fixed income focused strategies was +3.20% in September. Performance from Mortgage related strategies slowed during the month, but these funds continue to be the best performing strategies in 2009. The HFN Mortgages Index was +0.99% in September and +39.84% in 2009. Valuations on distressed assets have rebounded significantly since the end of the first quarter. The HFN Distressed Index was +5.34% in September and returned an average of 24.75% in the last six months bringing the Index to +22.85% YTD.

Equity (EQ) Strategies
The average performance from equity focused strategies was +3.02% in September. The HFN Long/Short Equity Index was +3.49% in September and +20.00% in 2009. Long/short funds appeared to have increased long exposures in September as the index trailed the S&P 500 TR only slightly during the month. Funds focusing on small/micro cap equities outperformed, as did funds focusing on the healthcare sector.

Commodity and Foreign Exchange (FX) Related Strategies
The CTA/Managed Futures Index again lagged the broad hedge fund industry in September. The Index was +1.09% during the month and +1.95% in 2009. FX related strategies, which have been the main drag on group in 2009, returned an average of +2.40% in September.

HedgeFund.net is a division of Channel Capital Group Inc.

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