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Total hedge fund capital increased by a net total of $40 billion in 2Q13 to a record $2.41 trillion. Hedge funds that took in new capital saw inflows of $55.9 billion during the quarter, while funds that experienced redemptions booked outflows totaling $41.4 billion, resulting in a net inflow of $14.5 billion, which is in line with the 1Q13 inflow of $15.2 billion. Sixty percent of all hedge funds experienced net inflows for 2Q13 while forty percent experienced outflows. The first half 2013 inflow of $29.8 billion surpassed 1H inflows in 2012 ($20.4 billion) and nearly matched the full year 2012 total of $34.4 billion.

The total number of hedge funds increased to over 10,000 funds for the first time since 2006, at which time a record number of 10,096 funds existed.

As the quarter concluded with a sharp rise in bond yields and widening high yield credit spreads, investors exhibited a preference for credit and interest rate sensitive Event Driven and Relative Value Arbitrage strategies, with these receiving over $14 billion of combined inflows in 2Q and nearly $25 billion in inflows for 1H13. With contributions from high performing Activist strategies and a dynamic M&A and corporate actions environment, the HFRI Event Driven Index led other main strategy areas for both 2Q and 1H13, gaining +1.8 and +5.7 percent, respectively. Recent inflows represent a reversal for Event strategies, which experienced net outflows of $6.6 billion in 2012. HFRI Relative Value Arbitrage Index was the leading area of both performance and capital inflows in 2012, posting a gain of +10.6 percent and inflows of over $41 billion, increasing Relative Value Arbitrage to the largest strategy area of hedge fund capital. The HFRI RV: Yield Alternatives Index is the leading sub-strategy area of hedge fund performance for 2013, posting a YTD gain of +12.1 percent through June.

Investors allocated $3.6 billion of new capital to Macro strategies in 2Q13, despite the HFRI Macro Index posting a decline of -0.5 percent for 1H13. Investors withdrew net $1.3 billion from Equity Hedge strategies in 2Q13, partially reversing a similar inflow from 1Q13 and resuming the EH outflow trend from 2012. HFRI Equity Hedge Index gained +5.3 percent in 1H13, although sub-indices HFRI Sector: Technology/Healthcare and Fundamental Value gained +8.9 and +8.6 percent, respectively.

Positive capital inflows occurred across all fund sizes, with firms below $500 million in AUM experiencing combined inflows of approximately $2.4 billion. The industry’s largest firms, those in excess of $5 billion in AUM, experienced net inflows of $6.1 billion, while firms between $1 and $5 billion experienced inflows of $5.8 billion. Investors withdrew $4.6 billion from Funds of Hedge Funds in 2Q13, bringing FY13 FOF redemptions to $9.6 billion.

“Hedge fund performance and capital flow trends reflect the contrast between the strong equity gains of 1Q13 and the sharp increases in bonds yields to conclude 2Q13, as investors exhibited a preference for exposures to powerful M&A and Special Situations trends and long/short exposure to credit and fixed income strategies, while reducing directional equity market exposure,” stated Kenneth J. Heinz, President of HFR. “Hedge fund managers and investors continue to position for a post-QE environment dominated by fundamental, mean-reverting and trend-following factors, with these in contrast to the macro policy and stimulus-dominated environment of recent quarters. As this environment develops, and concurrent with relaxation of certain marketing restrictions on hedge funds, investor preferences for sophisticated, specialized long/short exposure to these shifting dynamics are likely to drive hedge fund industry growth in 2H13.”

Press release

www.hedgefundresearch.com

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