LJH: Investors Cut Hedge Fund Investments By 14% In Second Quarter

August 13, 2003 (PLANSPONSOR.com) - As the broader markets have begun to rebound in recent months, investors have shied away from riskier hedge fund strategies.

With the stock market’s rally, traditional long-only investments have outperformed their hedge fund competitors, and between April and June investors put $1.2 billion into hedge funds, compared with the $1.4 billion invested in the first three months of 2003 (See Hedge Funds Heat Up at Start 2003 ), according to the latest LJH-Reuters poll of hedge fund managers.   The findings highlight a change in investor appetite triggered by a quick end to the Iraq War and signs that the US economy appears to be picking up speed.

“There may be a feeling that the worst is over,” said Suzanne Murphy, a managing director at Acorn Partners, which manages $500 million in alternative investments. “There is a perception that hedge funds have underperformed and when you have a big upward move, people will look more to ‘long-only’ investments.”

Of the $1.2 billion put into hedge fund in the second quarter, investors put the bulk of their money, $714 million, into equity hedge funds, down from $878.8 million in the previous quarter.   Most of the money going into hedge funds came from institutional investors who contributed $480 million compared to $352.6 in the first quarter. Funds of funds added $383 million and p ension funds, which had added $100 million in the first quarter, chipped in only $19 million in the second quarter, signaling some nervousness, the survey found.

Money Vacuum

Most notable though was were the money was not going, as the shift away from riskier strategies was evident in investors putting no new funds into convertible arbitrage funds after adding $88 million in the first quarter. Also, for the third consecutive quarter, no money went to short-biased funds – funds that bet against a company’s future. Short-biased fund managers who peddle in pessimism are the industry’s biggest losers this year, off an average 14.31% since January, data from the Hennessee  Group shows (See  Hedge Funds Up 1.24% In July ).

Further evidence of a shift away from risk strategies was also evident in the way money was allocated to hedge funds, with $212 million going to multi-strategy hedge funds which offer investors a greater selection of investment styles and spreads risk.

“The shift to multi-strategy hedge funds is a major trend in the industry this quarter,” said James Hedges, president and chief investment officer of LJH. Multi-strategy funds pulled in just $95 million in the first quarter. “This is where we see one stop shopping, where funds like Citadel Advisors and Och Ziff Capital Management are branded the winners and they will be the winners in the future too.”

The survey by LJH Global Investments and Reuters polled 64 US-based hedge funds about the allocations of their domestic and international clients.