Two Hedge Fund Strategies Picking Up the Slack

January 23, 2012

There are a few bright spots as hedge fund managers come off a dismal year for hedge fund performance. Two hedge fund strategies are showing the biggest inflow from investors looking to cash in on volatility.

Discretionary and systematic macro funds, which actively trade across all asset classes, showed a net inflow of $7.9 billion in the fourth quarter of 2011, according to data from Hedge Fund Research published in Hedge Funds Review.

A macro fund takes either long or short positions in various equity, fixed income, currency, and futures markets, depending on a manager’s view about overall economic or political situations in various countries or regions.

The other strong performer was relative value arbitrage strategies, which had net capital inflows of $5.9 billion in Q4 2011. Relative value arbitrage seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities, thereby allowing investors to potentially profit from a difference in value in the two securities.

Relative value arbitrage was the only overall hedge fund strategy category to generate positive performance in 2011, with gains of 0.51% for the year, according to Hedge Funds Review.

“Investors have been following “a consistent theme of reducing directional equity market beta while increasing exposure to currency, commodity and fixed income strategies,” said Kenneth Heinz, president of Hedge Fund Research.

Despite less-than-stellar returns, investors still allocated $70 billion of net new capital across the board to all hedge fund strategies in 2011. And performance gains by some of the larger, more established hedge funds helped lift the total assets for the industry up to $2.01 trillion.

Funds of funds, however, have continued to see their assets shrink, as investors withdrew roughly $8 billion last year. Total assets managed by FoF managers have fallen to $629 from $673, due to outflows, poor performance, and perhaps investors questioning the value of an extra layer of hedge fund fees.

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