Hedge Funds Attracted $45.2 Billion in Third Quarter
Hedge Funds Attracted $45.2 Billion in Third Quarter (Update2)
By Jenny Strasburg
Oct. 23 (Bloomberg) — Hedge-fund managers attracted $45.2 billion in the third quarter, a decline from record fundraising earlier in the year as subprime-mortgage losses hurt investment returns.
New money gathered from investors worldwide fell by more than a fifth from $60 billion and $58.7 billion in the first and second quarters, respectively, Chicago-based Hedge Fund Research Inc. said today in a statement. Deposits were the lowest since the final three months of 2006, when managers pulled in $15.8 billion. Returns averaged 1.36 percent in the third quarter, the smallest gain in a year, Hedge Fund Research said.
Year-to-date inflows still surpassed the $126 billion record for all of 2006, led by allocations to funds of funds, which farm out clients’ money to outside managers. U.S. mutual funds, which control $11.5 trillion, gathered $990 million during July and August, according to data compiled by the Washington-based Investment Company Institute.
“Lackluster returns in traditional securities markets have prompted many sophisticated investors to look to alternatives,” said Geoffrey Bobroff, an independent investment consultant in East Greenwich, Rhode Island. “The prospects for continuing challenges in the markets create an even greater appetite for alternatives such as hedge funds.”
Funds of Funds
Almost half of the new money managers from July to September, or $22.5 billion, came in through funds of funds, bringing those firms’ assets under advisement to $773 billion, according to Hedge Fund Research. The industry manages $1.81 trillion in all.
The crisis that started with home-mortgage loans to borrowers with risky or unproven credit histories sent equity and bond prices worldwide on a rollercoaster ride in the third quarter. The market for mortgage-backed securities shrank, hurting those who trade the bonds or sell them to investors. At the same time, investment banks had difficulty finding buyers for leveraged-buyout loans.
Boston-based Sowood Capital Management LP started the process of shutting down in August after losing about $1.8 billion on corporate debt. Bear Stearns Cos., the fifth-largest U.S. securities firm, posted its biggest earnings drop in a decade after it liquidated hedge funds invested in home loans.
The credit crunch spilled over to equity markets, causing losses in August at computer-driven funds including those run by Goldman Sachs Group Inc. The Standard & Poor’s 500 Index lost more than 6 percent from early July through mid-August, including the biggest one-day drop since February on Aug. 9.
Inflows by Strategy
The largest hedge-fund strategies led the industry’s fundraising in the third quarter, with $9.8 billion going to managers who invest in companies going through bankruptcies, mergers and other corporate events, according to Hedge Fund Research. Relative-value arbitrage managers, who try to take advantage of price differences among stocks, bonds and other securities, pulled in $9.2 billion. The strategy includes multistrategy-credit funds affected by declines in subprime and leveraged loans. Relative-value managers trailed returns in the industry with an average decline of 0.09 percent during the third quarter, the research firm said.
Long-short managers, who buy stocks they expect to rise in value while selling short other stocks they expect will decline, raised $8.5 billion. In a short sale, a trader normally borrows and sells shares, aiming to profit by repurchasing them after the price falls.
Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested. The funds typically charge a fee equal to 2 percent of assets and take a 20 percent cut of investment gains.
To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net
Last Updated: October 23, 2007 13:39 EDT