Hedge funds see first capital outflows in two years

The net outflow from hedge funds in the fourth quarter of last year totalled $696 million, compared with a net inflow of $6.8 billion in the third quarter. The last quarterly net loss occurred in the second quarter of 2000 and totalled $4.9 billion.

Tremont’s survey of nearly 3,500 funds found that the category that suffered the largest net outflow during the fourth quarter was long/short equity, losing a net $2.8 billion, followed by event-driven and global macro strategies.

Equity market-neutral strategies gained the most in assets in the fourth quarter, adding $1.3 billion, followed by fixed-income arbitrage, which gained a record $793 million, and managed futures with a record $725 million inflow.

“Once again, hedge fund investors seemed to be rewarding those strategies, such as market-neutral and managed futures, that are non-correlated to major markets and indexes,” said Barry Colvin, chief information officer at Tremont. “In addition, the flight to fixed income continued, reflecting a desire to stay in conservative strategies and protect principal.”

Event-driven and convertible arbitrage strategies were the two most popular investments for the year as a whole, gaining a net $3.4 billion and $3.2 billion, respectively. The only category that suffered a net outflow for the year was dedicated short bias, losing a net $17.4 million.

“Given the uncertainties in the economy and financial markets, 2002 appears to have been a good year for the hedge fund industry,” said Bob Schulman, co-chief executive at Tremont. “While fund flows slowed from the levels achieved in 2001, investors were nevertheless tapping hedge funds as a way to stay involved in the markets.”

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