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Investors Continued to Allocate Heavily into Hedge Funds

June 27, 2014 | About:

Hedge funds are a broad group of investment vehicles pursuing a wide variety of investment strategies. Last year, while the S&P 500 surged about 30% in 2013 due to gains in consumer confidence and housing rebound in the U.S., hedge funds left well behind. According to a Goldman Sachs (NYSE:GS) Group Inc. 2013 investor survey, the net return was 9.2% from their portfolios.

So, in this article let´s take a look at the return of different hedge funds based on their strategy they use.

Volume and Performance

Total assets in hedge funds surpassed USD3 trillion for the first time on record in May 2014, according to a report from eVestment. Last May was the fourth consecutive month of continued inflows. New capital added was about USD 22 billion and makes that year-to-date flows reach USD93.3 billion.

In terms of performance, some databases compute performance based on an equal weighting (indicating the performance of an average fund), other databases use size-weighted performance (indicating the overall performance of the hedge fund industry). For May, asset weighted return of 1.28% was above the 1% on an equal weighted basis.

Hedge Fund Universe

Event driven are strategies that are driven by the outcome of specific expected events, for example investing in distressed debt funds. Investors allocated heavily to these strategies in May. The USD 6.4 billion of inflows brings total allocations to USD31.1 billion for the year.

Positive sentiment appears to have returned to the MBS strategies. They had strong inflows in May of USD1.5 billion.

Global macro hedge funds make broad market bets on indices, currencies, commodities, and other asset classes based on expectations about specific markets and asset classes. They had their second consecutive month of net inflows in May. Although funds for USD1.6 billion were added during the month, it was not enough to bring the flows to positive territory considering the entire year.

Managed futures employ quantitative models to speculate in futures (commodities, equities, currencies, interest rates, etc). They provide the most diversification and hedging benefit of all the hedge fund strategies. They experienced their ninth consecutive month of outflows in May, the 20th month of net redemptions in the last 21.

Emerging markets funds invest in equity securities in such markets. Emerging markets are characterized by short-selling restrictions and limited availability of derivatives. Because short exposure is difficult or expensive to obtain in these markets, these funds have a distinct long bias. Investor sentiment towards these funds continues to be mixed: May’s outflows were the fifth month of flows changing direction from the inflow received the prior month.

Investors continued to allocate to equity exposure in May, a trend which has persisted since mid-2013. The USD11.5 billion added to equity strategies during the month brings YTD inflows to USD59.4 billion, the highest level.

Final Comment

Hedge funds look particularly attractive for a diversifier investor. The fact that the hedge fund universe includes a wide variety of financial assets strategies makes it difficult for them to outperform in a bull market.

The truth is that hedge funds have not been able to beat the market in the latest years. But according to the performance of May, we expect this could happen for the upcoming year.

Disclosure: Omar Venerio holds no position in any stocks mentioned.

About the author:

Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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