Only $16.4 Billion in Hedge Fund Capital Inflows in Q1 2008, the Lowest Total Since Q2 2004

Is the bloom finally coming off of the hedge fund rose?

According to Wall Street & Technology (link below), capital inflows for hedge funds were a measly $16.4 billion dollars in the first quarter of 2008. Sure, this sounds like plenty of money, but let's compare it to previous years. In 2006, capital inflows totalled $126.5 billion dollars, and in 2007 the number grew to $194.5 billion dollars (a record). This means that the total hedge fund capital inflows for all of 2008 should be around $70 billion dollars, assuming that this trend continues for the rest of the year. The first quarter of 2008 represented the slowest growth in hedge fund capital inflows since Q2 2004.

What's the reason for the sudden slowdown?

Consider this: a full 54% of total hedge fund capital comes from high net worth individuals. What have been some of the hardest hit areas in the real estate market? California, Florida and Nevada. Many high net worth individuals have either their primary residences or secondary residences in one of these three states. Many high net worth individuals accumulated wealth through their real estate holdings, so it only stands to reason that the recent swoon in the real estate market gave them a haircut just like pretty much everyone else. This is likely a big reason why capital inflows have been scaled back dramatically.

Another reason? Hedge funds likely don't have the appeal that they did a few years ago. The subprime mortgage mess decimated many hedge funds, and now the drop in commodity prices is wreaking havoc on a number more. Many high net worth individuals simply aren't prepare to stomach a 40% loss, so I imagine that they are temporarily looking for other places to invest - places that offer low risk and immediate access to their funds. I'm sure that there is nothing worse than suffering a 40% loss and then being told that you won't have access to all of your funds for up to three years due to investor lockups.

Also, I am sure that pension funds and institutions (which make up a large part of total hedge fund capital as well) are re-analyzing their investments in hedge funds as well.

Whatever the reason (or reasons), capital inflows are way off, and will likely put in the lowest number in many years when 2008 is done.

Source: Wall Street & Technology

Filed under: Hedge Fund News | The Economic Meltdown | General Market News