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Strong quarter for FOHFs but confidence needs rebuilding, says S&P

July 10, 2009 at 11:10 am

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After a year of continuous net outflows, total hedge fund assets rose 5.8 per cent during May with 1.0 per cent attributable to investor net inflows and 4.8 per cent attributable to retPARA_BREAK_SENTINEL_9f8e7d6c

After a year of continuous net outflows, total hedge fund assets rose 5.8 per cent during May with 1.0 per cent attributable to investor net inflows and 4.8 per cent attributable to returns, according to Hedgefund.net data published by Standard & Poor's Fund Services.

'Based on returns achieved by FOHFs rated by S&P Fund Services, we estimate that returns in the second quarter have been around five per cent, with six per cent achieved over the year to date,' says S&P Fund Services lead analyst Randal Goldsmith.

Across the underlying hedge fund strategies each individual strategy delivered a positive return in May apart from short biased.

Distressed strategies had their best month for over 18 years, returning 6.1 per cent.

Emerging market hedge fund performance was the strongest strategy in May (up 10.2 per cent) which was among the five best months on record.

FOHFs were slow to catch the turn in March after reducing net and gross exposures to historically low levels.

'Gross exposures remain low, but we have noticed net exposures within long-short equity hedge allocations moving up significantly,' says Goldsmith.

Investors who were quick to respond to disappointing returns have been much slower to react to improving performance.

'We think the primary reason for this is investor disappointment over the management of portfolio liquidity by hedge funds and FOHFs,' says Goldsmith.

A recent survey by KPMG suggests that better communication is needed to rebuild trust in the hedge fund industry.

'FOHFs that have restricted investor liquidity have a lot of work to do on their process and structure before stepping up communication,' says Goldsmith.

However, he says that for groups like Fundana, GAM, HDF, Permal, Gardner and Turnstone that did not gate/suspend investor redemptions or side-pocket investments, staying transparent and communicating regularly with investors is key.

During the past 12 months, the vast majority of FOHF rating actions have been negative.

S&P Fund Services ratings have been taken away from over ten per cent of FOHFs for poor liquidity management (the firm does not rate a fund that has over 20 per cent of the portfolio in a side-pocket or where dealings are suspended) or weaknesses in their risk management processes related to exposure to Madoff strategies.

In contrast, over the past 12 months, GAM Trading II was upgraded from AA to AAA because it has consistently made money for investors, including last year, and GAM's risk management is among the best in the industry.