The hedge fund industry posted an estimated outflow of USD3.5bn, or 0.2 per cent of assets, in April 2010, the third outflow in five months, according to TrimTabs Investment Research and BarclayHedge. 

Strong performance has added USD338bn to hedge fund coffers in the past year, lifting industry assets to USD1.65trn, the highest level since November 2008.

“Recent flow weakness is surprising,” says Sol Waksman, chief executive of BarclayHedge. “Industry performance has been stellar, and April is historically a strong month for subscriptions.”

The TrimTabs/BarclayHedge survey of hedge fund managers for May reveals that 52 per cent of 143 respondents are bearish on the S&P 500, while only 16 per cent are bullish.  Alternately, they like the greenback — 49 per cent are bullish on the US dollar index, while only 15 per cent are bearish. 

Additionally, 46 per cent of managers think the rescue package the European Central Bank and the International Monetary Fund announced on 10 May will have negative long-term effects on the European debt crisis. Only 27 per cent of managers believe the bailout will have a positive long-run impact.

“The bailout received a cool greeting, even within the eurozone,” says Vincent Deluard, global equity strategist at TrimTabs. “The ‘shock and awe’ rescue package is unlikely to prevent speculators from attacking European currencies and punishing heavy debtors.”

In April, funds of hedge funds received money for the first time since November 2009, while commodity trading advisers posted a second straight inflow. 

Event driven funds took in USD2.1bn in April, more than any other hedge fund strategy, while fixed income funds redeemed USD2.5bn, one of the largest outflows. Event driven funds boast a year-to-date return of 5.8 per cent, one of the best performances of all strategies.

“Hedge fund investors continued to shift into riskier strategies in April,” says Deluard. “They returned to chasing performance after a year during which they exercised extreme caution.”

The TrimTabs/BarclayHedge Hedge Fund Flow Report shows that the volatility of macro hedge fund returns fell to an all-time low in April, while leverage surged. Meanwhile, many funds are positioned in handful of similar trades.

“High leverage and herd behaviour make for a potentially dangerous cocktail,” adds Deluard. “Popular trades turning sour when everybody’s betting the same way could produce painful mass liquidations.”