Hedge Funds Post Inflow of $16.0 Billion (1.0% of Assets) in October 2010

Fourth Straight Inflow as Well as Heaviest since November 2009

Hedge Fund Investors Warming to Risk: Distressed Securities Funds Post Heaviest Inflow since February, while Fixed Income Funds Post Lightest Inflow in Six Months


TrimTabs Investment Research and BarclayHedge reported that the hedge fund industry posted an estimated inflow of $16.0 billion (1.0% of assets) in October 2010, the fourth straight inflow as well as the heaviest since November 2009.

“Flows are doubtless following performance,” said Sol Waksman, founder and President of BarclayHedge. “Hedge funds returned 1.95% in October and 7.10% in the four months following the May-June skid. Also, our preliminary data shows that hedge funds are outperforming the S&P 500 by about 21 basis points through November.

Distressed securities funds hauled in $3.8 billion (3.3% of assets) in October, the heaviest inflow of any hedge fund strategy, while emerging markets funds posted an inflow of $2.2 billion (1.0% of assets). Meanwhile, fixed income funds received only $506 million (0.3% of assets), the lightest inflow since April.

“Hedge fund investors are exhibiting a healthier appetite for risk,” noted Waksman. “They are finally venturing into areas like distressed securities after embracing conservative strategies for most of the year.”

Commodity trading advisors (CTAs) received $7.9 billion (2.8% of assets) in October, the eighth straight inflow, while funds of hedge funds took in $3.3 billion (0.6% of assets), the fourth straight inflow. Meanwhile, hedge fund managers are capitalizing on kind conditions heading into 2011.

“Borrowing money to buy assets is virtually costless, investors handed hedge fund managers $32.1 billion in the past four months, and margin debt is soaring,” explained Vincent Deluard, Executive Vice President of Research at TrimTabs. “At the same time, the rolling 12-month beta of hedge fund returns sits below the long-term average, and that of equity long-short funds is dipping below zero. Managers should be especially eager to book fat profits through year-end, but they remain very reluctant to make directional bets on equities.”

Managers are also extremely bearish on the 10-year Treasury note, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers. Bearish sentiment soared to 49% in November from 28% in October, while bullish sentiment sank to 13%, the lowest level since the inception of the survey in May.

“Retail investors and pension funds have been pouring money into high-flying fixed income for nearly two years,” noted Deluard. “But now hedge fund as well as retail bond inflows have ground to a halt, and mom and pop are ditching munis and junk. The more the infatuation with bond funds fades the more we fear the fallout will prove particularly ugly.”