Hedge fund inflows still run strong

Hedge funds had their second-best fundraising quarter in April, May and June, attracting $58.7 billion globally from investors despite growing losses in investments backed by sub-prime mortgages.

The hedge fund industry, which took in a record $60 billion in the first quarter, now oversees $1.74 trillion, up 22% from the end of 2006, said Chicago-based Hedge Fund Research Inc. That increase reflects investment gains as well as cash inflows.

The average hedge fund worldwide returned 7.7% in the first half of 2007, beating the Standard & Poor’s 500 index’s 6.9% gain including dividends.

“Hedge fund flows follow performance, and hedge fund performance has been excellent,” said Brett Barth, a partner at New York-based fund investment firm BBR Partners.

The data indicate that exposure to securities backed by sub-prime mortgages “has not yet resulted in a generalized, systemic impact on indexes of creditfocused hedge funds or on the broader hedge fund universe,” Kenneth Heinz, president of Hedge Fund Research, said in a statement.

Two hedge funds managed by New York-based Bear Stearns Cos. lost almost all their assets when bonds backed by sub-prime mortgages lost value, the firm told investors this month.

Braddock Financial Corp. of Denver said this month that it planned to liquidate its Galena Street hedge fund after sub-prime losses led investors to seek to pull out more than 60% of the fund’s assets.

United Capital Markets Holdings Inc. in Key Biscayne, Fla., halted redemptions this month in some of its Horizon funds invested in bonds backed by sub-prime mortgages to avoid dumping holdings at a discount.

Other funds, however, have minimized their sub-prime exposure or profited from betting that securities backed by sub-prime mortgages would lose value, Heinz said.

The Paulson Credit Opportunities Fund, which positioned itself to profit from rising defaults on loans to borrowers with poor credit, soared 129% this year through June 30, according to a July 5 letter to the New York-based firm’s investors.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

So-called macro funds had the biggest percentage gain in the amount of money brought in during the second quarter, raising $6.9 billion, more than triple the figure for the first quarter, Hedge Fund Research said.

Macro funds, which bet on stocks, bonds, currencies and commodities worldwide, posted a return of 5.83% in the first half of this year.

Relative-value arbitrage funds, which try to take advantage of price differences between securities, brought in $16.4 billion in new money last quarter, an increase from $10.3 billion in the first quarter and the most of any fund category. The relative-value category includes multistrategy credit funds with sub-prime exposure.

Endowments and pension funds could triple their hedge fund investments to more than $1 trillion by 2010 as those institutional investors seek better returns, according to an October 2006 study by Bank of New York Co. and consulting firm Casey, Quirk & Associates.

“The worry is that investors are putting money into hedge fund strategies thinking they’ll be different from other markets, then find out they’re not that different,” said John Godden, head of London-based IGS Group, which invests in hedge funds for pension fund managers and other institutional investors.