Hedge Fund Asset Flows Signal Investor Sentiment Shifts

Business Wire, August 18, 2008

HFN Releases Q2 2008 Hedge Fund Asset Flows & Performance Report

NEW YORK -- HedgeFund.net today released the Q2 2008 Hedge Fund Asset Flows & Performance Report. The report estimates total hedge fund assets increased 4.41% in Q2 2008 to $2.973 trillion.

The HFN report is unique in its comprehensive approach to tracking asset flows as it combines a bi-annual survey of hedge fund administrators along with information from the industry's largest active database of hedge fund information to compile total industry asset and flow data.

To see a sample or order a copy of the report please visit: www.HedgeFund.net

Following are broad industry asset flow trends worth noting:

Hedge Funds:

* Investors allocated an estimated $34.21 billion to hedge funds in Q2 and performance gains added an additional $91.28 billion to total assets. The dollar amount of fund liquidations during Q2 was larger than new fund launches by an estimated $8.52 billion; the third highest level of fund closures on record. Despite liquidations, large funds appear to have attracted enough capital to grow the hedge fund industry at an organic growth rate (change in total assets excluding performance) of 11.06% in the last year.

Funds of Hedge Funds:

* Fund of funds experienced net withdrawal of investor assets in Q2 2008 for the second time on record. FoF liquidations were greater than new fund launches and allocations to existing funds by an estimated $470 million. Allocations to existing FoFs were the third lowest dollar value on record and lowest as a percentage of total FoF assets. Performance gains actually lifted total FoF assets to an estimated $1.439 trillion, an increase from Q1 of 2.43%.

Hedge Fund Growth by Region:

* Hedge funds located in Europe saw the largest rate of organic growth. New allocations of $21.47 billion to funds located in Europe increased total assets 2.62%. Combined with performance gains, total European hedge fund assets rose an estimated 4.80% to $857.65 billion. Funds operating in Asia saw total assets fall an estimated $3.12 billion from a combination of performance losses and investor withdrawals. Redemptions alone resulted in Asian hedge fund assets falling $1.14 billion in Q2.

Following are asset flow trends which show shifts in investor sentiment:

Investors Favor Fixed Income over Equities:

* For the third consecutive quarter, investors have reduced allocations to equity strategies and increased allocations to fixed income related strategies. Equity focused hedge fund assets experienced a net outflow of investor assets of $6.18 billion from Q1, however performance gains lifted total equity fund assets 2.16% during the quarter. Fixed Income strategies experienced organic growth of 3.04% during Q2 and when combined with performance gains resulted in total fixed income focused fund asset increasing 6.55% from Q1 to an estimated $613 billion.

* Funds focusing on corporate fixed income related securities accounted for the majority of the increase. These funds saw organic growth of 7.59% in Q2, despite a slight net outflow from fund liquidations. Funds focusing on mortgage related fixed income securities experienced the highest rate of growth within fixed income strategies in Q2. These funds saw total assets rise 19.05% to an estimated $35.04 billion and organic growth accounted for the vast majority of the increase. In Q1 and Q2 08, new allocations from investors increased mortgage related fund assets 14.35% and 16.92%; a sign of significant investor interest.

Emerging Market Allocations Slow:

* Allocations to emerging market hedge funds have slowed significantly in the last three quarters. In Q2 08, new allocations increased total assets by only 0.64% from Q1 compared to 10.64% a year ago. Performance gains during Q2 resulted in a rise of total EM assets of 2.55% during the quarter, but gains were far below Q1 performance losses of $27.80 billion.

* Losses in Q4 07 and Q1 08 led to redemptions in emerging Asia focused funds in Q2 08. Funds investing in Latin America saw net investor redemptions as well during the quarter. The outflow was small, a decline of 2.86% following a near record of organic growth in Q1 of 31.17%. When performance gains are included, total LatAm focused fund assets rose 6.61% in Q2 08 to an estimated $22.53 billion.

* Total assets in funds investing in Developing Europe increased 9.39% in Q2 to an estimated $99.77 billion. Investors allocated an estimated $3.16 billion to these funds resulting in organic growth of 3.46%. Funds investing in Africa/Middle East experienced their highest total of new allocations in Q2 as investor interest in the region expanded. Total assets in these funds rose 18.78% in Q2 with new allocations of $733 million.

Event Driven and Special Situation Fund Assets Soar:

* Dislocations in credit markets and credit related securities in recent prior quarters, event driven and special situations funds experienced record growth in Q2 2008. Total assets in these funds increased 16.31% to $390.42 billion. New allocation accounted for the highest level of growth for these funds since 2004. Investors allocated an estimated $32.26 billion to existing funds and the net of new launches and liquidations accounted for a record inflow of $13.55 billion.