Poor hedge fund performance in the first half of 2005 has not slowed the flow of money coming into the industry looking for real returns, trade publication EuroHedge said on July 27. A survey carried out by EuroHedge shows a record 150 new European hedge funds raised more than $13 billion in the first six months of this year compared with 128 new funds and $9.5 billion in the same period last year.
Analysts had thought investors would have been put off by weak average returns of 1 to 2 percent between January and June compared with around 3 percent for the same period last year.
Average hedge fund returns are expected to fall to between 5 and 7 percent this year compared with 7 and 9 percent in 2004.
"It's been quite a tough market for hedge funds, but the industry is still growing," Neil Wilson, managing editor at EuroHedge, told Reuters. "It's a continuation of the medium to long-term trend ... More assets going into absolute (real) return strategies from traditional long-only funds." Hedge funds aim to deliver absolute or real returns as opposed to relative returns based on benchmark indices.
Traditional fund managers normally track benchmark indices and have to keep most of their assets in the market even when prices are falling, one of the reasons why investors lost large amounts of money during the 2000 equity crash.
Hedge funds can withdraw completely from the market if they want and put all their money on deposit, so that they at least earn money market interest rates. They can also use derivatives and short sell to manage investment risks.
A significant change this year is the number of larger launches. In the first half of the year, there were five new launches with assets of $1 billion or more at the start. In the whole of 2004 there were just two.
The biggest growth was seen in long/short European equity, hedge funds that buy stocks they think are cheap and short sell those they see as expensive, where 39 new funds raised $2.66 billion. Another 24 global equity funds raised $575 million. "In other non-equity areas, the average size of the fund is generally larger," EuroHedge said. Just 9 new global macro funds, which make directional bets on stock, bond, currency and commodity markets on the basis of economic fundamentals, raised $2.5 billion compared with $237 million in the first six months of last year
Four fixed income funds raised $1.3 billion, 13 credit funds raised $1.19 billion and only one new convertible bond hedge fund was launched raising $7 million.
Global macro hedge funds are generally seen as riskier because they rely more on the skills of a manager and returns can be more volatile, while returns from strategies that use computer models are likely to be less volatile. Aspect manages around $2.8 billion of assets. Three of its hedge funds trade futures, one is a Japanese equity fund, one is a European equity fund. The sixth is a multistrategy fund that invests in the company's other hedge funds.
Futures are traded on margin, where only a proportion of the cost of the contract has to be paid, so Aspect normally has around 75 percent of its assets in cash or securities which can easily be turned into cash.
The average return of the six funds for the half-year to end-June is about 4.75 percent net of fees, above industry averages between 1 to 2 percent. The MSCI index of world stocks over the same period was down 0.4 percent.
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