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May 2010 Hedge Fund Performance Worst Since November 2008
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Losses Drop YTD 2010 Returns to +1.32%
CHICAGO, (June 7, 2010) – Hedge Fund performance was adversely impacted by the escalation of the Euro-centric sovereign bond
crisis in May, with the HFRI Fund Weighted Composite Index declining by -2.26% for the month. May was the worst performance
month since Nov 2008 and inclusive of the recent loss hedge funds have surrendered a large portion of early year gains, ending the first
five months of 2010 with a gain of +1.32%. Hedge funds were broadly impacted by the sharp increase in risk aversion associated
directly with the sovereign bond crisis escalation, as well as the effects this situation has had on global equity markets, corporate fixed
income and currency markets.
Equity Hedge was the worst area of strategy performance, declining -3.7% in May, the worst month since Nov 2008. Global equity
markets were broadly impacted by the increase in risk aversion, with weakest areas of performance in Fundamental Growth only
partially offset by gains in Short Biased and Equity Market Neutral strategies.
Event Driven also posted sharp loss of -2.2% on increasing risk premiums in announced transactions and weakness in the corporate
credit markets, with weakest areas of performance in Distressed and Shareholder Activist strategies.
Relative Value Arbitrage posted a loss of -0.98%, as losses in Convertible Arbitrage and Corporate credit strategies were only partially
offset by gains in Volatility and Asset Backed strategies. May losses have pared 2010 gains for RVA, bringing YTD performance to
+4%, but May also snaps a streak of 16 consecutive months of gains for Relative Value, the last monthly decline was December 2008.
Macro posted a loss of -0.94% as gains in currency focused funds were offset by losses in other Discretionary Macro strategies;
Systematic Diversified Macro experienced a wide dispersion across constituents, with an average decline of 1% in May.
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HFR Strategy Classification
Single-Manager Hedge Funds
Multi-Manager Funds
Equity Hedge
Event-Driven
Macro
Relative Value
Fund of Funds
Equity Market
Neutral
Activist
Active Trading
Fixed Income –
Asset Backed
Conservative
Fundamental
Growth
Credit Arbitrage
Commodity
Fixed Income –
Convertible Arbitrage
Diversified
Fundamental
Value
Distressed /
Restructuring
Agriculture
Fixed Income –
Corporate
Market Defensive
Quantitative
Directional
Energy
Merger Arbitrage
Fixed Income –
Sovereign
Strategic
Sector
Private Issue /
Regulation D
Metals
Volatility
Multi
Energy /
Basic Materials
Special Situations
Technology /
Healthcare
Multi-Strategy
Short Bias
Multi-Strategy
Discretionary
Energy
Infrastructure
Systematic
Real Estate
Discretionary
Thematic
Systematic
Diversified
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Yield Alternatives
Currency
Multi-Strategy
Multi-Strategy
HFR Regional Investment Focus Classification
America
Asia
Europe
Other
North America
Japan
Western Europe /
UK
Africa
Latin America
Asia ex-Japan
Russia /
Eastern Europe
Middle East
Pan-American
Asia with Japan
Northern Europe
Global
Pan-European
Multiple
Emerging Markets
Emerging Markets
Africa
Asia ex-Japan
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Latin America
Middle East
Russia /
Eastern Europe
Multiple
Emerging Markets
Estimated Growth of Assets / Net Asset Flow
Hedge Fund Industry 1990 – Q1 2010
$2,000,000
$ 1,868,419
$1,750,000
$ 1,667,906
$ 1,600,156
$ 1,464,526
$1,500,000
$ 1,407,095
$1,250,000
$ 1,105,385
$ 972,608
Assets ($MM)
$1,000,000
$ 820,009
$750,000
$ 625,554
$ 539,060
$ 490,580
$500,000
$ 456,430
$ 374,770
$ 367,560
$ 256,720
$250,000
$ 185,750
$ 167,790
$ 38,910
$0
$ 58,370
$ 8,463
$ 194,515
$ 167,360
$ 95,720
$ 99,436
$ 91,431
$ 55,340
$ 73,585
$ 46,545
$ 57,407
$ 27,861 $ 36,918
$ 14,698
$ 70,635
$ 46,907
$ 23,336
$ 4,406
$ 126,474
$ 13,756
($ 1,141)
($ 131,180)
($ 154,447)
($250,000)
($500,000)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Estimate d Asse ts
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2000
2001
2002
2003
Ne t Asse t Flow
2004
2005
2006
2007
2008
2009
Q1
2010
TOP HEDGE FUND FIRMS ASSUME LEADERSHIP
IN INDUSTRY RECOVERY
Hedge Fund Research, Inc.
Capital inflows concentrated in industry’s largest firms;
Investors continue to focus on structure, UCITS
CHICAGO, (April 20, 2010) – The hedge fund industry continued the recovery that began in 2009, with the HFRI Fund Weighted Composite Index
gaining +2.56 percent for 1Q 2010, bringing the industry within two percent of its previous high watermark reached in October 2007, according to
data released today by Hedge Fund Research (HFR), the leading provider of hedge fund industry data.
During the quarter, investors allocated $13.7 billion of new capital to the global hedge fund industry; this combined with a
performance-based asset increase of $54 billion bringing total industry capital to $1.67 trillion.
All four main strategy areas experienced asset growth in the period, led by Event Driven strategies into which investors allocated
$5.6 billion of new capital. Performance for the strategy was strong as well, with the HFRI Event Driven Index up +4.7 percent for the quarter,
driven by significant contributions from Activist and Distressed sub-strategies. The smallest net inflow occurred in Macro strategies, with these
receiving less than $1 billion of new capital. Macro funds posted only a modest gain of +0.2 percent for the quarter, with performance undermined by
commodity weakness, falling volatility and a lack of persistent trends across asset classes. Equity Hedge and Relative Value strategies also posted
both asset and performance gains for the quarter, with Relative Value completing 1Q10 with 15 consecutive months of performance gains.
Inflows concentrated in largest firms
While sixty percent of all funds experienced net inflows for the quarter, inflows were concentrated in the industry’s largest firms.
Investors allocated $14.9 billion to firms with greater than $5 billion in assets under management (AUM), while firms managing between $500
million and $5 billion experienced net outflows of $3.7 billion combined. The overall concentration of industry assets increased, with firms greater
than $5 billion (5.1 percent of all funds) now managing over 62 percent of industry capital. Larger funds narrowly outperformed smaller funds during
both 1Q10 and 2009, with the asset-weighted version of the HFRI Fund Weighted Composite Index gaining +2.8 percent and +20.3 in those periods,
respectively.
The percent of funds which reached their respective high watermark in the trailing twelve months rose to 52.2 percent. In addition to
an increased interest in allocating via separately managed accounts, investors continue to demonstrate interest in UCITS III complaint vehicles; HFR
now tracks nearly 400 UCITS III fund products.
“In contrast to the environment of the last two years, the drivers of hedge fund performance have recently shifted to tightening
corporate credit, declining equity market volatility, currency adjustments and rising sovereign credit risk,” said Ken Heinz, President of HFR. “While
allocations reflect continuing trends in Event Driven & Arbitrage strategies, investors are also focusing on fund structure and transparency, as well as
new opportunities presented in currency, commodity and fixed income markets.”
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Distribution of Net Asset Flows by Firm AUM Tier
Q1 2010
$16,000
$14,918
$14,000
$12,000
Net Asset Flows ($MM)
$10,000
$8,000
$6,000
$4,000
$2,000
$1,181
$545
$814
$0
($1,531)
($2,000)
($2,170)
($4,000)
< $100 Million
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$100 to $250
Million
$250 to $500
Million
$500M to $1
Billion
$1 to $5 Billion
> $5 Billion
HEDGE FUND LIQUIDATIONS RISE DESPITE PERFORMANCE GAINS,
FUND OF FUNDS CONSOLIDATION ACCELERATES
Hedge Fund Research, Inc.
Industry leverage moderates from pre-crisis levels;
Incentive fees continue to decline
CHICAGO, (June 8, 2010) – After falling steadily for four quarters, hedge fund liquidations rose again in the first quarter of
2010 with 240 funds closing during the period, according to the HFR Market Microstructure Industry Report released today
by Hedge Fund Research (HFR), the leading provider of hedge fund industry data and analysis. Liquidations were
disproportionately skewed towards Fund of Funds (FOF), with 102 FOF closing in the quarter, this marks the seventh
consecutive quarter in which FOF liquidations have exceeded new launches.
Aggregated industry leverage employed by hedge funds has continued to moderate relative to five years ago,
with seventy percent of all funds, which manage eighty-three percent of industry capital, utilizing some form of leverage. In
the HFR Special Report: Hedge Fund Leverage, Relative Value Arbitrage and Macro strategies commonly employ higher
levels of leverage than Event Driven and Equity Hedge strategies. Standard leverage metrics vary broadly across the hedge
fund industry, with over half of all funds typically employing between 1 and 2 times investment capital. Larger funds
typically exhibit a greater usage of leverage, with nearly 30 percent of all funds greater than $1 billion employing leverage in
excess of two times their investment capital.
Incentive Fees continue to fall as fund performance dispersion declines
Indicative of continued pressure from investors for more attractive investment terms, average incentive fees
declined by 8 basis points to 19.12 percent in 1Q 2010, the steepest drop since 2Q 2008, although average management fees
were unchanged for the quarter at 1.58 percent. Performance dispersion between the best and worst deciles of performance
narrowed in the less volatile period, with the top decile of all hedge funds returning an average of +15.2 percent, while the
bottom decile lost an average of -8.6 percent.
“Both investors and fund managers are continuing to exhibit a heightened sensitivity to leverage and risk, even
with the benefit of the performance recovery from 2009,” said Ken Heinz, President of HFR. “Managers are employing lower
levels of leverage in response to higher realized asset volatility and higher costs of obtaining leverage, as well as investor
preference for a less volatile return profile.”
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Estimated Number of Funds Launched/Liquidated
1996 – Q1 2010
2,500
2,073
2,000
1,518
1,435
1,500
1,197
1,087
1,094
Number of Funds
1,000
784
673
507
659
450
500
348
261
328
254
0
(109)
(52)
(115)
(57)
(71)
(92)
(162)
(176)
(240)
(296)
(500)
(563)
(717)
(848)
(1,000)
(1,023)
(1,500)
(1,471)
(2,000)
1996
1997
1998
1999
2000
2001
2002
Launche s
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2003
2004
2005
Liquidations
2006
2007
2008
2009
Q1 2010
Average Incentive Fee per Strategy
Changes from Q1 2008 – Q1 2010
19.34
19.15
19.27
19.25
19.22
19.18
19.21
19.20
19.12
Event-Driven
19.37
18.92
19.18
19.07
18.88
18.79
18.63
18.49
18.53
Equity Hedge
19.80
19.66
19.80
19.77
19.93
19.95
19.92
19.94
19.81
19.46
19.39
19.48
19.50
19.38
19.15
19.18
19.17
19.33
20.00
19.13
19.01
19.07
19.08
19.04
19.02
19.14
19.14
18.97
25.00
Relative Value
All Single-Mgr
Strategies
Incentive Fee %
15.00
8.05
7.94
7.75
7.25
6.50
6.79
7.38
6.94
7.33
10.00
5.00
0.00
Q1 2008
Q2 2008
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Q3 2008
Macro
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Fund of Funds
Q4 2009
Q1 2010
HFRI Fund Weighted Composite Analysis
Dispersion of Average Fund Performance by Deciles
12-Months Rolling ending Q1 2010
140.00
124.48
120.00
114.15
100.00
80.00
79.64
60.60
Return %
60.00
54.85
49.06
39.20
40.00
36.01
27.91
32.57
20.00
25.39
19.02
23.03
17.03
12.22
10.74
15.00
6.54
5.51
9.25
0.00
2.23
1.26
4.37
(1.82)
(3.18)
0.25
(8.92)
(4.48)
(16.62)
(20.00)
(20.10)
(40.00)
1st Decile
2nd Decile
3rd Decile
Top 25% Decile ROR
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4th Decile
5th Decile
Decile Average ROR
6th Decile
7th Decile
Bottom 25% Decile ROR
8th Decile
9th Decile
10th Decile
Estimated Distribution of Leverage
Number of Single-Manager Funds
Q1 2010
Typically Does Not
Employ Leverage
29.6%
Employs Leverage
70.4%
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Estimated Distribution of Leverage: Standard Leverage (Normalized to 100%)
Number of Single-Manager Funds
Q1 2005 vs. Q1 2010
80%
69.8%
70%
65.1%
60%
50%
40%
34.9%
30.2%
30%
20%
10%
0%
2005 1Q
2010 1Q
Typically Doe s Not Employ Le ve rage
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Employs Le ve rage
Estimated Distribution of Leverage: Standard Leverage
Number of Funds vs. Industry AUM
Q1 2010
Number of Funds
AUM of Funds
70%
70%
60%
60%
53.8%
50%
50%
40%
40%
40.9%
34.9%
30%
30%
27.2%
20.8%
20%
20%
11.0%
9.8%
10%
10%
1.3%
0.2%
0%
0.1%
0%
T ypically Does Not Employ
Leverage
1-2X
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2-5X
5-10X
>10X
T ypically Does Not Employ
Leverage
1-2X
2-5X
5-10X
>10X