HFN Industry Overview: March 2011

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On April 25, 2011 with 3,292 hedge fund products reporting, the HFN Hedge Fund Aggregate Index was +0.12% in March and +1.41% YTD 2011 while the S&P 500 Total Return Index (S&P) was +0.04% during the month and +5.92% YTD.

Hedge Fund Industry March Highlights:

•Total industry assets rose an estimated 0.63% to $2.552 trillion in March. Net investor allocations accounted for the majority of the asset increase and performance increased assets only slightly.
•Volatility spiked in March due to several major events and in this environment, fixed income strategies produced better average returns than equities with commodity strategies showing mixed results.
•Mortgage focused funds continued to perform well and were the best performing strategy in Q1 2011 followed by funds focused on the healthcare and energy sectors.

Monthly Asset Flow Estimates
•Total estimated hedge fund assets at the end of March 2011 were $2.552 trillion, an increase of 0.63%, or $15.95 billion from February.
•Performance accounted for an increase of $1.05 billion and investors accounted for a net inflow of $14.90 billion.
•The core rate of growth (% asset change due to investor allocations/redemptions) was 0.59%, a decline from February, but above the last twelve month average.
•Total hedge fund AUM is now 15% below the all-time high set in Q2 2008.

Net investor flow information continues to indicate strong interest investing directly into hedge funds. March inflows showed the ninth straight month of net allocations. The core rate of growth for Q1 2011 of 1.82% was the largest since allocations increased AUM 2.02% in Q4 2009.

Sub-Sector Specific Flows
•At the time of writing, investor flows for funds investing in Japan were positive for March; more likely the result of strong performance prior to the disaster. HFN will monitor Japan fund flow estimates in future monthly reports.
•Allocations to commodity strategies slowed in March, but were still positive. Mortgage strategies had the highest rate of allocations by product focus during the month and in Q1.
•Funds focusing on European markets experienced net investor redemptions in March while funds investing in Latin America had the highest rate of allocations.
•Market neutral and credit strategies had the highest rates of allocations in March. Distressed funds had their third straight month of net allocations and statistical arbitrage strategies continued a trend of redemptions in March.


Performance Review

Fixed Income (FI) Strategies
•The average return of all fixed income focused strategies was +0.48% in March and +2.39% year-to-date.
•Mortgage funds performed best in March, +1.25%, and distressed funds continued to post positive returns, +0.26%.
•Fixed income fund assets rose 1.82% in March to an estimated $675.3 billion. Investors added net $10.9 billion during the month.

Equity (EQ) Strategies
•The average return of all equity focused strategies was +0.27% in March and +1.62% YTD.
•Funds investing in emerging market equities had the best returns, +1.68%, followed by those investing in real estate related equity markets, particularly in emerging countries.
•Equity fund assets rose an estimated 1.15% to $836.8 billion in March. Investors allocated a net $3.98 billion during the month; a decline from February, but above the trailing six month average.

Commodity and Foreign Exchange (FX) Related Strategies
•Broad natural resource commodity strategies were -0.93% in March and +0.41% YTD.
•Funds investing in oil and energy markets performed well, +1.39% and metals sector funds returned an average of +0.44%. Average results were hurt most by quantitative focused trend following strategies.
•FX funds were +0.14% in March and -1.09% in Q1 2011. Agriculture commodity strategies performed better than average, +2.37% during the volatile month.

Summary Analysis
Investor interest in hedge funds was again high in March resulting in a very strong Q1 for industry growth. However, outside of the mortgage and energy sector, no other fund classification has a majority of its constituents outperforming equity markets in 2011. About 15% of the industry is currently beating the S&P.