HFN Industry Overview: June 2011

Complete report

On July 22, 2011 with 3,560 hedge fund products reporting, the
HFN Hedge Fund Aggregate Index was -1.16% in June and
+0.42% YTD 2011 while the S&P 500 Total Return Index (S&P)
was -1.67% during the month and +6.02% YTD.

Hedge Fund Industry June Highlights:

• Total industry assets fell an estimated 0.91% to $2.562
trillion in June. Performance accounted for the majority of
the asset decrease and net investor allocations were slightly
positive for the month.
• The primary factors influencing performance in May
continued in June and the downward pressure on
commodities and increased risk aversion hurt CTA/managed
futures and equity strategies for the second straight month.
• Fixed income strategies generally outperformed equity
funds, but both groups were down in June. Mortgage sector
funds posted their lowest return since November 2008,
however the average return was still positive.
• Japan focused funds posted their first positive aggregate
results since the natural disaster in March. Funds in Japan
had the best aggregate regional results in June.

Prior to May and June, the industry had not had two losing
months in a row since the financial crisis. The European debt
crisis has likely resulted in lowered exposures to risky assets and
losses in May and June were the result of this deleveraging.
Defensive sectors and volatility strategies have performed well
during the stretch. The HFN Healthcare Index was +4.10% in Q2
and the HFN Short Bias Index was +2.80% in June.

HFN developed the Outlier ratio to determine which sectors are
producing returns outside of their normal ranges. In June,
mortgage related strategies, though positive on average, had
the second lowest average ratio which is an indication that lower
levels of returns and losses are popping up from the group.

• Total estimated hedge fund assets at the end of June 2011
were $2.562 trillion, a decrease of 0.91%, or $23.6 billion
from May.
• Performance accounted for a decrease of $28.1 billion and
investors accounted for a net inflow of $4.46 billion.
• The core rate of growth (% asset change due to investor
allocations/redemptions) was 0.17%, a decline in growth for
the second consecutive month and the second slowest rate of
growth in the past 12 months.
• Total hedge fund AUM is now 15% below the all-time high set
in Q2 2008.

The trend in Q2 was three declining months of growth. While
investors continued to allocate more than was redeemed,
momentum has slowed. For the quarter, investors added an
estimated net $32.4 billion and for the year a net of $75.3
billion. This is far greater than either the first or second halves
of 2010.

Sub-Sector Specific Flows

• The uptick in flows into Japan focused funds for the two
months (April/May) following the disaster in March stopped in
June and the group had slight net outflows during the month.
• After two months of net outflows, there was a rise in
allocations to funds investing in Latin America while Eastern
European focused funds continued the trend of redemptions.
• For the first month in the last seven, commodity focused
funds had net redemptions while credit strategies continued
to grow at a higher rate than equity strategies.
• Despite a second straight month of higher than average
losses, investor allocations to tech sector funds continued at
an above average rate.
• Market neutral equity funds had the highest strategy specific
rates of inflows in June and statistical arbitrage strategies
suffered larger than average redemptions.

Performance Review

Fixed Income (FI) Strategies

• The average return of all fixed income focused strategies was
-0.18% in June and +3.69% year-to-date.
• Government bond strategies performed best in June,
+0.41%. Mortgage strategies were the only other positive
group, +0.10%. All other fixed income classifications were
down in June.
• Fixed income fund assets rose 0.51% in June to an estimated
$696.6 billion. Investors added net $4.1 billion during the
month.

Equity (EQ) Strategies

• The average return of all equity focused strategies was
-1.13% in June and +0.56% YTD.
• Short bias funds led all others in June, +2.80%. Natural
resource sector funds were at the other end of the spectrum,
-3.10%.
• Equity fund assets fell an estimated -1.05% to $843.6 billion
in June. Investors allocated a net $690 million; the second
lowest total in 2011.
Commodity and Foreign Exchange (FX) Related Strategies
• Broad natural resource commodity strategies were -2.56% in
June and -2.34% YTD.
• Funds investing in metals markets lost most in June, -7.20%.
FX strategies followed their worst month since 2003 with
another down month, -0.66%, leaving the group -1.99%
YTD.
• Agriculture sector funds led the commodity sector group, but
were still down in June, -0.52%.

Summary Analysis

The effects of broad market uncertainty appear to have finally
materialized in hedge fund flows in June. It is important to
remember that investor decisions to allocate or redeem
generally lag current or even one month prior return data
indicating June flows were evidence of rising caution two or
three months prior. Given this scenario, it will likely be a slow
start to the second half of 2011 in terms of industry growth.