Hedge funds may have started to lose their widespread popularity after experiencing tough market con...
Hedge funds may have started to lose their widespread popularity after experiencing tough market conditions, according to a new quarterly report.
The amount of money invested in the market slumped to just $7.5bn over the second quarter of 2004, according to Chicago-based Hedge Fund Research.
But the previous four quarters had seen inflows averaging $21.2bn - and they had never dipped below the $19.6bn mark.
According to Joshua Rosenberg, president of Hedge Fund Research, market conditions in the first quarter hit many hedge fund investment strategies.
"Less than ideal trading conditions for hedge funds were characterised by sudden reversals in market trends and low levels of pricing differentiation between assets," he explained.
The HFRI Fund Weighted Composite index, which measures performance across all hedge fund sectors, averaged -1% during the quarter. The results represent the first quarterly decline since the 3.9% drop in the third quarter of 2002, but when combined with the inflows, hedge funds assets under management were up slightly to $865.9bn from $864.7bn at the end of quarter one.
However, Rosenberg believes the fact most asset classes moved in a "highly correlated fashion" in an environment of historically low levels of volatility made it difficult to find any pockets of opportunity. "Given the difficulty of these market conditions, we take it as a good sign the industry only gave up 1%," he added.
HFR has also drawn up a list of interesting trends and performances from the second quarter which shows the $39bn Distressed Securities category led all hedge fund sectors with a 3.2% return during the period.
These results have been credited to the strong quarterly performance of high-yield bonds, which have been rather immune from the interest rate risk affecting the investment grade debt market.
The $23bn Fixed Income: Mortgage Backed Securities category also posted solid results, up 1.8% on the quarter, representing a 5.2% improvement over the course of this year.
It has now notched up seven consecutive quarters of positive growth and only one negative one since the third quarter of 2000, which has been due to the continued health of the mortgage industry.
But the data by HFR had bad news for the $25.4bn emerging markets sector, which invests in foreign securities or the sovereign debt of developing countries, with a 5% slump during the second quarter - its first since the third quarter of 2002.
The decline is in sharp contrast to the 39.4% performance gain achieved in 2003 and the 9.7% uplift in quarter one, 2004.
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