The hedge fund juggernaut appears to have slowed sharply, with inflows from investors drying up along with returns.
Hedge funds, as measured by the Hedge Fund Research Composite index, showed their first quarterly loss in two years in the three months to June 30. The index, which measures 19 strategies worldwide, fell by 1 percent.
Net investment fell sharply to $7.5 billion, also the lowest level in two years. Inflows have averaged more than $20 billion a quarter for the past year.
HFR is one of several hedge fund databases competing for business in the rapidly growing sector. All have slightly different data and methodologies, but tell the same story: investors have been pouring money into hedge funds just as the asset class has begun showing historically low returns.
Returns have been skimpy for months, prompting questions about whether hedge funds are the all-weather performers investors hoped for. The HFR index rose just 2.7 percent for the six months to June, lagging the Standard and Poor's 500 index, which gained 3.44 percent during the same period.
Several fund of fund managers who offer investors diversification by investing in as many as 100 different hedge funds said on Thursday that they were not expecting returns to reach much more than 5 percent this year. That is far short of the average 14 percent a year hedge funds have returned since 1990, according to HFR.
Hedge fund warnings
Individuals as diverse as Alan Greenspan, chairman of the US Federal Reserve, investor Warren Buffett and bond manager Bill Gross have recently warned that hedge funds cannot sustain their historically high levels of returns.
Yet, until the latest quarter, investors have been pouring record amounts of money into the asset class, and there has been a steady stream of defections from Wall Street and the money management industry into the sector. Carl Icahn, the buy-out investor, has become the latest big name to announce he is setting up a hedge fund.
Five of the 19 hedge strategies tracked showed outflows in the latest quarter. Unless inflows bounce back, some of those new funds may have trouble reaching full size.
HFR said 12 of the 19 strategies lost money in the latest quarter, compared with only one short selling in the first quarter. The best performer was distress investing, which returned 3.2 percent. It was also the best performer for the year so far, with 8.2 percent.
Josh Rosenberg, president of HFR, said low volatility made it hard for hedge funds to make money during the quarter.
"The majority of asset classes moved in a highly correlated fashion," he said. This hit arbitrage, a favorite hedge fund strategy. Macro funds, one of the biggest strategies with $100 billion invested, lost 3.3 percent during the quarter, its first loss in four years.
The HFR data are based on 4,000 funds, of a total of about 7,000 in the industry, and go back to 1990.