eVestment | HFN focus strategy report: financial sector

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Overview: financial sector hedge funds

EVestment |HFN active and inactive databases, performance and information on assets of 89 unique funds investing primarily in the financial services sector. There are an additional 35 funds investing in multiple industries and has explicitly taken note of the exposure of the economy.

The classification is much equity oriented and includes exposure to different subsectors including large and small banks and financial services to businesses, thrifts, insurance, and specialty finance firms. Strategies are primarily long/short, but the event driven, focusing on consolidation is a common theme.

The Angel in a relatively poor performing market, the Group has produced returns and volatility statistics are similar to the broad hedge fund industry in both 2011 and LTM.
• The Group has substantially performed financial sector benchmarks 2011 both in terms of performance (900 + points) and volatility (almost half the standard deviation of monthly).
• Investor sentiment towards financial sector funds has been better than most other sector specific equity funds in 2011, but still far below average in the industry.

The financial sector has become one of the most volatile capital market sectors during the last 12 months. The threat of a large-scale sovereign crisis in Europe together with increased regulation have done in and invest in the sector a challenge. The rest of the report takes a closer look at asset flow and performance trends in the classification to determine sources of benchmark outperformance and measure investor sentiment.

Total asset levels and investors flow trends
eVestment |HFN tracks AUM and publishing time estimates for funds investing primarily in the financial sector. Global hedge fund exposure to the sector can be significantly larger, but tracking impressions of sectors means is not possible at this time.

• Total AUM in funds investing primarily in the financial sector was 15.81 billion dollars at the end of October 2011, a decrease of 2.05 billion dollars or 6.21% through 10 months of the year.
• Investor's redemption net 610 million dollars from the group in 2011 to a core decline 3.59%. This compares with a growth rate of 2.21% for hedge funds industry 2011 core.
• Performance has reduced the financial sector fund AUM estimated 440 million dollars to October; an asset-weighted return of approximately 2.91% compared to-1.63% for hedge funds.
• "Investors have been net redeemers of assets from the financial sector funds in 9 of the last 12 months, but it was the jump in distributions in September.

Despite the above average and sustained total payments from the financial sector hedge funds, have been pockets of investors ' interest in 2011 and has mostly for those funds that performed in 2010. Average net total 2011 for funds returns exceed the Fund's average financial sector 2010 was 7.05 million dollars. Average 2011 flow for those crisis management 2010 was a net redemption 14.27 million dollars.

However, no Fund really doing in 2010 and have a meaningful input 2011 is posting positive returns the current year or returns greater than the average for the group in 2011. A potential positive for AUM will emerge is that there are no large funds have experienced net outflows so far, but also performs very well. It is probably these funds that will attract investments by 2011.

Regional performance trends
Table 5 compares the percentile ranks financial sector funds over the past 12 months based on their declared regional investment aid focus.

• The European sovereign crisis has seriously affected the relative performance of funds investing in the region's financial sector. Proceeds from the Group Global economy also shows high exposure to the European economy.
• The U.S. economy has not only performed the Confederal Group of the European economy by almost 400 bps 2011, they have also performed all focused hedge equity funds and the sum of the hedge fund industry YTD.
The Angel good relative performance, fewer than one-third of U.S. focused financial sector funds are positive in 2011. Those are large, up an average of + about 12%. The task is that the minority has made the right call in the group in 2011 and they have been rewarded.

Financial sector focused Sub Strategies
Figure 9 shows the performance of economy focused medium with stylistic systematic and their relevant broader hedge fund peer groups.

• Financials sector funds invest based on a fusion/event driven, dramatic crisis management their peers during a prolonged period.
• Clean and broad capital market movements has been much affected by macro events overwhelming micro factors, wider event driven and fusion/risk arbitrage has performed long/short equity strategies suggest idiosyncratic factors are blamed for the poor performance of event driven/fusion financial resources.
• Small/Mid CAP funds have performed well compared with the broader financial sector funds. The Group posted better results than long/short equity funds, but crisis management towards sector size independent small/micro cap over a longer time perspective.
• Both biased style groups showed significantly higher volatility compared to the broad economy focused sector funds, but was well below the NYSE financial indices and the S & P 500 TR.

Performance comparison of equity sector
Funds investing in financial records was in the middle of the pack in comparison with other sector specific equity strategies, LTM.

• Perhaps surprisingly, financial sector funds showed the lowest volatility of the preceding 24 months in relation to other sector specific equity funds (based on the annualized standard deviation); natural resources sector topped the list.
• Sector specific equity funds continue to show high strategy correlations, varies between 0.76 (financial resources) to 0.87 (financial to property) since Jan-2009.
• Healthcare focused funds, generally regarded as a defensive sector, has performed all other equity sector groups on the basis of the current year.

Forward
Economy has received much attention since the financial crisis both in terms of the role played and how some companies have performed in a unique environment then. European sovereign debt crisis continues to loom over large parts of the industry and MF Global bankruptcy was reminscent of the risks for 2008. The sector has, however, sufficient diversity both by market cap and industry subsector for managers to efficiently outperform benchmarks. In addition, the sector remains volatile and trading at levels seen in mid-2009, managers can see the possibilities. Downside risks, however, may be close to all time highs as effective assurance is absolutely key.

Although overall performance has shown controlled downside volatility for the group, will many individual economy oriented funds have to show greater resistance to beta-driven losses to stem outflows in the near future. In the intermediate term, secular changes in performance drivers for many funds come from the eurozone crisis, particularly the recapitalization of banks. These events will give the macro backdrop against which subsectors and company specific microeconomic events will challenge. Investors in space should be aware of any funding expectations and plans for management of these factors.

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eVestment | HFN Regional Focus Report: Developed Europe

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Overview: Developed Europe Focused Hedge Funds

The eA|HFN active and inactive databases have performance and asset information for 204 unique funds that invest primarily in developed European markets. There are an additional 317 funds which invest broadly across all European markets. The latter may have large exposure to developed markets, but are kept separate to ensure the prior group is a pure representation of developed Europe focused strategies.

•In the midst of the sovereign crisis in the Eurozone, funds investing in developed Europe have performed relatively well in 2011, -4.67% vs. -13.92% of the Stoxx Europe 600, however most lag the aggregate hedge fund industry.
•Investor interest in developed and broad Europe focused funds has been below average. Funds have had an estimated net outflow of $1.8 billion in 2011, or 1.0% of total AUM vs. 2.8% growth for the hedge fund industry.
•On a regional basis, developed Europe focused funds have had the highest rate of combined liquidations and non-responsive fund delistings in the HFN database.

The European sovereign debt crisis has been a slow developing fiscal mess which has severely hurt investor confidence. Hedge funds investing in these markets appear to have been defensively positioned, but there are still pockets of large losses. The remainder of this report will look at the sub-groups of funds investing in the region to see if outperformance of regional equity markets appears to be tactical or if it is more a factor of breadth of strategies and smoothed aggregate performance.

Developments in European Markets and Impacts on HFs
The European sovereign debt crisis has had global market implications, but the effects on European equity markets and hedge funds that focus on them has been direct in terms of relative performance, investor redemptions and liquidations. Following are highlights from the eVestment | HFN database on those funds focused primarily on developed European markets.

•Last twelve month percentile rankings of equity focused developed and broad Europe funds has lagged other developed equity market exposures at all data points.
•Figure 5 illustrates to what extent developed Europe fund performance has tracked the severity of the sovereign debt crisis as characterized by the spread between Greek and German two year sovereign yields. September appears to be another difficult month as the spread nearly doubled and the Stoxx Europe 600 was down almost 10% before the month end rally.
•The eA | HFN database has recorded a 12.4% decline in developed Europe focused funds due to liquidations and non-responsive fund delistings in 2011, nearly double that of broad Asia focused funds and 1.8x higher than North America funds.
•30% of developed Europe funds reporting through August are positive YTD. If September results are similar to August, less than 20% of funds will likely remain in positive territory. Of those reporting through August, 42% are down more than 5%.
•There is virtually no difference in average YTD performance for UCITS structured developed Europe focused funds and those not structured as UCITS.
•Despite above average investor outflows and performance losses, developed Europe focused funds remain larger on average than N. America funds ($212mm vs. $206mm), both of which dwarf the average size of Asia focused funds ($130mm).

There are pockets of positive returns amongst developed Europe focused funds, however no single sub-sector appears to be keeping its head above water. The implication being that positive returns are driven more so by the quality of management than environment. There is a proportional mix of credit, equity and commodity (power markets) funds among those up for the year.

Total Asset Levels
eA | HFN tracks AUM for funds investing across all European markets, including emerging Europe, but has not previously estimated flows for those investing solely in developed Europe. By backing out estimates for emerging Europe we can estimate flows for funds investing solely in developed Europe and broadly across all European markets, the latter being predominantly focused on developed Europe:

•AUM in funds investing across all European markets was estimated at $220.7 billion at the end of August 2011, down from a pre-2008 crisis peak of over $400 billion.
•At the end of August, HFN estimated emerging market Europe fund AUM of $44.8 billion and therefore an estimated $175.9 billion in AUM in funds investing primarily in developed broad European markets.
•Approximately ? of the combined AUM, or $44 billion is invested solely in developed European markets.
•Investors have withdrawn an estimated net $1.8 billion from Europe non-EM focused funds in 2011. This follows net redemptions of $13.3 billion in 2010.
•Redemptions in 2010 began in earnest in May ($10.7 billion net redeemed in May/June 2010) coinciding with the first major spike in European sovereign yields.

The investor flow data paints a very clear picture that investors have been actively reducing exposure to European markets, on an aggregate basis, since the first major fears of a sovereign default in the Eurozone. The rates of redemptions have slowed, but persisted in recent months.

Performance Comparisons by Region/Country
Developed Europe focused funds generally invest across many Eurozone markets; however there are a number of funds which invest either primarily in the U.K., or in Nordic markets. U.K. funds operate almost entirely in equity markets whereas Nordic funds have concentrations of funds trading regional power markets, mortgage bond and the equity markets.

Figures 8 and 9 and the table above show the performance of these funds and their sub-market classifications and performance of other developed country specific hedge fund exposures and equity benchmarks.

•Despite being primarily equity market oriented, U.K. focused hedge funds have performed very well compared to the FTSE 100 Index, however both are in negative territory mostly due to August returns. In September, the FTSE lost an additional -4.93%.
•Nordic equity focused managers have performed very well compared to regional EQ benchmarks. The credit related strategies have fared worse. Performance from these funds has been weighed down by those with leveraged exposure to Danish mortgage bonds.
•Canada focused funds are the only country specific group which has been unable to outperform the relevant equity benchmark in 2011.

Performance by Primary Strategy in Developed Europe
Funds investing in European markets typically fall into one of five primary strategies; Long/Short EQ, Market Neutral EQ, Event Driven, Credit and Multi-Strategy. Figures 9 and 10 and the table on the following page illustrate the relative performance of funds utilizing these strategies in developed European markets to their counterparts operating primarily in other developed market.

•There is a high concentration of funds investing the Danish mortgage market in the developed-only credit group. These funds appear to have suffered after the Basel III proposal determined the bonds would have a limited role in bank holdings as liquidity instruments.
•The classification of broad European credit funds, which have performed more in-line with other developed market credit funds, is more indicative of developed European credit expsure, however their descriptions of regional orientation tend to be more open ended.
•European market neutral equity and event driven strategies have lagged their developed market counterparts by a wide margin in 2011.
•Long/short equity funds have been in-line with North America focused strategies. Asia/Pac long/short funds have performed noticeably better in 2011.

The last page of the report contains full correlations of monthly returns between regional primary strategies and both equity and hedge fund benchmarks over various time frames.

Going Forward
Among the high concentration of equity focused managers in developed European markets, there appears to be a pronounced defensive positioning which has led to the large outperformance during recent market declines. Early indications for September show an average return of -1.38%, compared to a decline of -4.78% in the Stoxx Europe 600, however this may drift lower as more funds report. Combined developed and broad Europe funds are -0.54%.

In the longer term, it is difficult to ignore the consideration that amid this crisis there may be massive value and opportunity being created, similar in concept to the environment mortgage related strategies realized post-2008 financial crisis. The declining rates of net outflows in recent months may be an indication that allocations may be beginning to return in anticipation. Where and when opportunities will be available are obviously the key, but chances are there will be hedge funds at the forefront.

HFN will publish Europe focused fund flows estimates in the both the early performance release due out Tuesday October 11th and in the Monthly Industry Report the week of the 24th.

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HFN Strategy Focus Report: Statistical Arbitrage

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Overview: Statistical Arbitrage
The HFN active and inactive databases contain over 60 unique fund products with a primary investment strategy focused on statistical arbitrage. The commercial database contains 16 active funds, 2 of which are structured as UCITS. HFN tracks an additional 9 unique funds which focus on volatility arbitrage which have characteristics similar to statistical arbitrage strategies. Performance and Equity Volatility

•Statistical arbitrage funds were +1.72% in July and -1.23% YTD 2011. This compares to +0.37% YTD for equity hedge fund strategies, +4.60% for credit, -0.50% for commodity strategies and +0.72% for the broad hedge fund industry.
•Volatility arbitrage strategies were -0.30% in July 2011 and -1.85% YTD 2011.
•HFN estimates total hedge fund assets invested in statistical arbitrage strategies were $32.43 billion at the end of July 2011.

Statistical arbitrage (stat arb) strategies vary widely in terms of position holding time horizon and style, but the similarity across all of these funds is the fully quantitative nature of trade construction and execution. Position holding periods vary from fractions of seconds where algorithms attempt to find opportunity in market microstructure dynamics, to days or even weeks when the perceived arbitrage opportunities are geared towards mean reversion across similar securities. Lastly, stat arb is often part of larger, multi-strategy platforms which indicates the AUM is spread beyond pure stat arb funds.

Statistical Arbitrage and other Quantitative Fund Characteristics
The aggregated qualitative details of statistical arbitrage strategies in the HFN database give an indication of the collective characteristics of the group in the entire industry.

•There is a larger than average concentration of stat arb funds operating out of Europe than the U.S. Paris in particular is home to a larger than normal percentage of funds.
•Stat arb fund launches peaked in 2007 before stalling during the financial crisis. Launches resumed in 2009 and remained elevated through 2011.
•The average stat arb entity has $317.8 million in strategy assets, compared to the average equity strategy size of $207.8 million and average industry aggregate size of $333.04 million.
•Half of the stat arb funds listed on HFN explicitly denote market neutrality as central to their strategy.

Total Asset Levels and Flows Estimates
Despite the presence of new fund launches stat arb AUM has meaningfully declined since reaching a post crisis peak in early 2010.

•HFN estimates total assets invested in stat arb strategies at the end of July 2011 were $32.34 billion. Early estimates for August show AUM likely increased during the month counter to the broad industry.
•Total AUM has decreased 16% in the first seven months of 2011, or $5.9 billion. AUM decreased 3% in 2010 after climbing to an all-time peak of $42.5 billion in March of that year.
•Performance has reduced AUM an estimated $670 million in 2011 which indicates an asset weighted performance of -1.64%. Comparing this figure to the equal weighted performance of -1.23% indicates larger funds stat arb funds have performed worse than smaller funds in 2011.
•Stat arb investors have withdrawn an estimated $5.3 billion for a core decline of 14% compared to a core increase of 2.5% for the overall industry.

Performance and Equity Volatility
Figure 10 shows the returns of statistical arbitrage funds, relative to equity strategy performance, compared to the VIX. Monthly VIX averages were calculated using daily close figures.

•In relatively volatile environments, measured by monthly VIX over the historical average, statistical arbitrage funds tend to outperform equity strategies. The converse also holds true; in calm environments statistical arbitrage funds tend to underperform equity strategies.
•Since 2002, statistical arbitrage funds outperformed equity strategies by +0.62% on each month the monthly VIX was above its historical mean, on average. Below average monthly VIX showed underperformance for statistical arbitrage funds of -0.72% relative to equity strategies.
•Early 2009 was an exception to this trend, possibly attributable to managers’ beliefs of sustained volatility in the equity markets following the financial crisis.
•The trend is even more pronounced when measured against the change in volatility measured as month over month change in monthly VIX averages. Upward sloping volatility showed a +0.97% (+1.22%) outperformance by statistical arbitrage (volatility arbitrage) funds compared to equity strategies and a -1.22% (-1.38%) underperformance in downward sloping volatility environments.

Going Forward
Although recent media coverage of “black box” strategies may leave statistical arbitrage out of favor with certain investors, contained variance and relatively low correlations to other more common hedge fund strategies (see page 5) make it an attractive option.

Despite recent trends in investor sentiment, the current environment may be a boon to statistical arbitrage funds with investors looking for safe harbors in relative value strategies. Equity markets were volatile in August with upward VIX movement contrasting sharply with recent history. It seems statistical arbitrage funds were better positioned than most showing an early estimate of -0.08% compared to equity strategies posting -4.33% for the month. The coming months will be crucial for statistical arbitrage funds with accurate interpretation of uncertain markets, on an absolute basis and relative to other funds, required to stem the momentum behind further redemptions.

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HFN strategy focus report: Event driven/special situations

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Overview: Event Driven & Special Situations

The HFN active and inactive databases contain nearly 400 unique fund products with a primary investment strategy focused on event driven and special situations. The commercial database contains 225 products, 67% of which are unique with 4 of the unique products structured as UCITS.

•The HFN Event Driven Index was -1.09% in June and +1.42% YTD 2011. This compares to +0.65% YTD for equity hedge fund strategies, +4.06% for fixed income, -2.50% for commodity strategies and +0.39% for the broad hedge fund industry.
•HFN estimates total hedge fund assets invested in event driven and special situations (ED/SS) strategies were $515.41 billion at the end of Q2 2011.
•HFN estimates there were 80 ED/SS funds launched in 2010 against 24 liquidations. There had been a net decline in ED/SS funds the prior two years.

ED/SS strategies focus on a variety of objectives and typically utilize a combination of equity and debt related securities. The majority of special situations funds refer to the same catalysts that event driven strategies exploit which is why the groups have been combined in this report for asset flow and performance measures. In addition to shared catalysts including M&A, spin-offs, regulatory changes, share buybacks, changes in capital structure, etc., the group often also has distressed situations as targets. The remainder of this report breaks down ED/SS classifications to elucidate performance differentials.

Event Driven & Special Situations Fund Characteristics
The aggregated qualitative details of event driven and special situations strategies in the HFN database give an indication of the collective characteristics of the group in the entire industry:

•New York is the most common city in which ED/SS strategies base their operations exceeding the popularity of other cities by a wide margin. This is paralleled by the U.S. being the most common country for operations.
•ED/SS fund launches peaked in 2007, but the group also had the second largest % decline in fund counts during the financial crisis behind fixed income arbitrage.
•The average ED/SS entity has $440.5 million in strategy assets, compared to the average equity strategy size of $203.7 million and average industry aggregate size of $314.4 million.
•While the majority of the current crop of ED/SS funds invest in the entire capital structure, a slightly smaller group focuses primarily on equity investments.

Total Asset Levels and Flows Estimates
Event driven and special situation fund AUM increased rapidly in 2010 following above average performance in 2009. More recently, volatile equity markets appear to have led investors to reduce exposure to the group.

•HFN estimates total assets invested in ED/SS strategies at the end of Q2 2011 were $537.1 billion. Early estimates for July show continued, but muted, performance losses and an uptick in redemptions.
•Total AUM has increased 4.1% in the first six months of 2011, or $21.1 billion. AUM increased 26% in 2010 and 49% in 2009.
•Performance accounted for a $6.9 billion increase and investors added net $14.1 billion in the first half of 2011.
•Despite the influx of assets, the recent trend is negative. In Q2, performance reduced AUM $6.3 billion and investors redeemed a net $4.2 billion.
•The rate of AUM change due to performance has led the ED/SS benchmark through July which is an indication that larger funds (which have a smaller representation) have outperformed smaller funds during the year.

It is not surprising to see rising net redemptions from the group in the last three months. ED/SS funds were one of the earliest to return to net inflows following the financial crisis and had one of the three highest core growth rates in 2010 behind only fixed income and merger arbitrage. Increased volatility in equity markets has negatively influenced allocations to directional equity related strategies and ED/SS funds have been affected. The bulk of net inflows to the group resulting in its rapid post-crisis growth were from June 2009 through May 2010.

Performance by Product Size
Figures 6-8 show returns for ED/SS funds by fund size over the last 24 months (Figure 6) and over the last 5 years (Figures 7-8). Asset groups are defined by fund $AUM at the beginning of the period to best quantify returns by actual fund size at the time of initial interest.

Returns by strategy assets differ slightly. ED/SS entities appear to have a higher concentration of managed accounts and so actual fund size may not be the best indication of the size of an ED/SS operation.

•Mid-sized ($100-$500 million) ED/SS funds outperformed all other asset groups at every percentile ranking. This varies from the industry where smaller funds exhibit the highest upside and the largest funds show the most controlled downside.
•The group, assessed over the last 12 months using assets in strategy, maintained the aforementioned trend. ED/SS entities with over $500 million in strategy assets averaged 9.55% over the LTM while those with assets between $100 and $500 million averaged 14.91%.
•Looking back 5 years, the largest ED/SS funds outperformed smaller funds pre-crisis, but under-performed post-crisis. Contrary to the rest of the hedge fund industry, it was not the smallest ED/SS funds which rebounded fastest post-crisis, rather the mid-size $100-$500mm funds.

Performance by Regional Focus
Figures 9-12 break down the performance of ED/SS funds by their primary regional exposure, or the region in which their event driven strategies are focused.

•Event driven strategies with targeted regional exposures have outperformed each corresponding regional benchmark in 2011.
•In the last twelve months, only event driven strategies with exposures to Australia trailed their regional benchmarks. In the last two years, only Aussie and EM funds have trailed their regional hedge fund benchmarks.
•In the last twelve months, U.S. focused ED/SS funds had the most impressive spread between top 10th percentile and 75th percentile. A/P focused funds had the highest bottom 90th percentile, but failed to produce high top percentile rankings.
•ED/SS emerging markets performance appears to be more beneficial than broad EM exposure in volatile markets (comparing 2011 to the last 2 years which includes the broadly positive second half of 2009), but in no specified time frame has ED/SS emerging markets exposure produced meaningfully better results than ED/SS U.S. exposures.

Performance by Market Sector Focus
Figures 13-14 break down the performance of ED/SS funds by primary industry exposure. For the most part, ED/SS funds do not specify a focus on a particular industrial sector, but those that do tend to focus on the resources/energy, healthcare, finance and technology sectors, in that order.

•In both the last twelve months and YTD 2011 time frames, sector specific exposure appears to have benefited healthcare and natural resource focused ED/SS funds compared to non-sector focused ED/SS strategies. However, only natural resource ED/SS strategies outperformed the average corresponding sector specific EQ fund.
•The average finance sector ED/SS fund has underperformed all relevant comparisons. Looking within the sample, there is one product which has outperformed the average finance sector equity funds in 2011, but performance is still below the average of all ED/SS funds.

With the exception of resources strategies, sector specific ED/SS funds appear to have been unable to outperform their EQ sector specific counterparts. Additionally, outperformance over non-sector specific ED/SS funds seems to be due to sector specific exposures and may not necessarily come from sector specific ED/SS expertise.

Going Forward
There are several factors influencing the outlook for the ED/SS space. Corporations, at least in the U.S., have an increasing amount of cash on their balance sheets. A recent publication of corporate cash balance indicators from the Association of Financial Professionals (AFP)1 showed that more firms had increased the levels of cash on corporate balance sheets both from Q1 to Q2 in 2011 and year-over-year from Q2 2010 to 2011. Additionally, corporate borrowing costs are near the lowest levels in 10 years (but slightly off these lows through August) as seen by Aaa rated corporate rates and the spread between Aaa and Baa rates.

Despite the large amount of cash on hand and low borrowing costs, the current volatile global economic and political climates have likely reduced the attractiveness of deploying cash. Alternatively, sharp declines in equity markets can make share repurchases and takeover targets more attractive. However, neither is likely to be accelerated until volatility declines. This confluence of factors, combined with the rapid increase of AUM in the ED/SS space throughout the end of 2009 and 2010 indicate investors believed an active event driven environment would persist.

For equity oriented investors, outside of market neutral strategies, and despite being in negative territory on average, event driven funds are holding up relatively well. Both equal and asset weighted performance estimates for the last three months through July show that event driven strategies have outperformed equity market indices, the average long/short equity strategy and the aggregate average of all hedge funds. This is a firm indication that amid recent volatility there is still some level of support in the event driven markets.

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HFN regional focus report: the Middle East and Africa

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Overview: hedge funds invest in MEA

HFN active and inactive databases have performance and asset information for 85 unique funds investing primarily in the region of the Middle East and Africa (MEA). Of these, 59 unique products of the active database. For this report, are resources grouped into one of three classifications for their regional investment focus, the Middle East/North Africa, Pan-Africa and South Africa only.

• South Africa focused funds performed well in 2011 after backlogged 2010 while MENA funds have lagged the rest of the hedge fund industry over the past three years.
• Pan-Africa funds directly the hedge fund industry since becoming a recognizably classification in 2006, but since the beginning of the uprising in Tunisia and Egypt, average performance is almost 6%.
• HFN estimates the total assets in funds that invest primarily in all three regions was 8.78 billion dollars at the end of May 2011 with AUM in MENA strategies narrowly higher than South Africa.

Months after the initiation of the revolutions in Tunisia and Egypt, MENA average fell almost 6% and Pan-African agents decreased more than 6% while South Africa focused funds increased 7%. Themes such as investment in regions vary, obviously, but each face serious headwinds shortly.

The following pages break down the qualitative composition, investors flow trends and performance of MEA focused resources to shed light on the source of their different yields and current investor sentiment against these products.

HFN database composition and its properties
The qualitative features of the Middle East and Africa focused resources in HFN database gives an indication of the dominant characteristics of these products:

• South Africa focused Fund launches was greatest in 2003 and continued in the above average by 2006, but has declined while the liquidations of cow's milk added in 2010.
• Mena Fund launches peaked in 2006 and 2007, followed by the above, average liquidation in 2009. New launches have not been near the pre-2008 prices.
• Pan-Africa funds is a relatively new group, with the launches were originally ursprungshalten 2007 and again reaches a high 2010.
• Compared to MENA focused resources, South Africa and the Pan-African agents had minimal shutdowns after the financial crisis.
• The majority of MENA funds operated by the arab States and South Africa running out in South Africa funds, but the majority of the Pan-Africa funds operated out of London.

Total assets levels
HFN has not historically tracked assets and routes for Pan-Africa and South Africa focused means of MENA. In addition, estimates the AUM below for funds which invest mainly in the regions and the total hedge fund AUM invested in the region. Total AUM hedge fund invested in the region is probably much higher because of the multi-regional emerging market funds, including investing:

• Mena focused funds AUM peaked in Q2 2008 nearly 10 billion dollars. The Summit was concurrent with high total hedge fund industry AUM, while supply decline after the financial crisis was more dramatic and recovery slower. MENA Fund AUM reached a low of less than 4 billion dollars in Q1 2009, and is now only slightly larger.
• Investor reactions to civilian uprising in the MENA region was net redemption 2011. Redemption from MENA focused strategies speeded up in March and April 2011 peaked.
• South Africa focused funds had approximately 3.27 billion dollars in AUM at end of May. Investor redemption passed appropriation during the first three quarters of 2010, but the trend seems to have reversed in 2011, but the growth has been slow.
• Pan-Africa focus Fund AUM reached estimated 977 million dollars at the end of May 2011. Despite good performance relative to industry in 2010, there were net redemption during the year. Core growth in 2011 is 2.8 per cent, which is slightly lower than average in the industry.

Correlation of returns
Figure 6 shows the relationship between monthly for MEA focused funds to other regional and country specific emerging market HFN indices and relevant equity benchmarks for three specified time frames. Information is useful to compare historical relationships and how they have changed.

• South Africa focused funds have historically had a low correlation to the country's stock markets. The ratio has been reversed in the last 12 months.
• Mena focused funds historically had low but positive correlations to other emerging markets and regional equity benchmarks, but these correlations increased and be high after the financial crisis.
• Pan-African Fund correlations have been added during the financial crisis, but has fallen back in recent months, but they still remain above historical levels.
• Mena fund performance resembles most closely that traditional emerging markets, while the Pan-Africa and South Africa funds tend to be less correlated. This illustrates the different growth stories in Africa and the larger emerging markets which are more closely related to the buy-out market influences.

Compared to other emerging markets
The table below, Figure 7 and 8 and the table at the bottom of the report, compare the returns from Mea funds to emerging market hedge fund HFN indices and regional equity indices.

• Since 2001, South Africa focused funds crisis management MSCI South Africa Index during the down months only once, the best against the record in the three groups.
• The average outperformance in the index, with South Africa funds down months since 2001 is more than 700 points. The average underperforming during positive index is slightly worse months than 450 bps.
• In the past two years, South Africa funds have seen their average outperformance in equity benchmark down months decreased and have also seen underperforming during index up months from worsening.
When comparing historical returns the last two years, only MENA resources has continued to produce returns with greater average outperformance in equity index benchmark down months than average underperforming under benchmark up-months.

Middle East and Africa UCITS products and funds of funds
HFN can create benchmarks for further subclassification of MEA products that meet the standards set out in the directive on UCITS funds of funds investing in the region.

Forward
Investors ' interest in funds focused on the markets of the Middle East and Africa have been below average for the year 2011, which is a clear indication investors aren't comfortable with the current social and political climates in the region. Outside of South Africa, has so far shown decision performance wise. In hedge fund space there is a history of the returns covered by investors who recognizes emerging opportunities sooner than the rest. The last known example is in based security after the financial crisis.

There are a number of reports from the Oakland Institute require attention for private investments, including hedge funds and other institutional investors, in soil in Africa with an eye on the development of agriculture. Reports that raises the questions of the extent to which government interests adapt to the local population and to long-term best use of land, but the existence of the research is evidence of potentially profitable opportunities in these markets. Still, there will always be political uncertainty and given the effectiveness of the insurgency in northern countries, there is still a high risk to invest in the region. In addition, it is important to remember that past performance has proven that the MENA and Pan-Africa focused funds showed high correlation to developed markets in times of global stress.

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HFN regional focus report: the Middle East and Africa

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Overview: hedge funds invest in MEA

HFN active and inactive databases have performance and asset information for 85 unique funds investing primarily in the region of the Middle East and Africa (MEA). Of these, 59 unique products of the active database. For this report, are resources grouped into one of three classifications for their regional investment focus, the Middle East/North Africa, Pan-Africa and South Africa only.

• South Africa focused funds performed well in 2011 after backlogged 2010 while MENA funds have lagged the rest of the hedge fund industry over the past three years.
• Pan-Africa funds directly the hedge fund industry since becoming a recognizably classification in 2006, but since the beginning of the uprising in Tunisia and Egypt, average performance is almost 6%.
• HFN estimates the total assets in funds that invest primarily in all three regions was 8.78 billion dollars at the end of May 2011 with AUM in MENA strategies narrowly higher than South Africa.

Months after the initiation of the revolutions in Tunisia and Egypt, MENA average fell almost 6% and Pan-African agents decreased more than 6% while South Africa focused funds increased 7%. Themes such as investment in regions vary, obviously, but each face serious headwinds shortly.

The following pages break down the qualitative composition, investors flow trends and performance of MEA focused resources to shed light on the source of their different yields and current investor sentiment against these products.

HFN database composition and its properties
The qualitative features of the Middle East and Africa focused resources in HFN database gives an indication of the dominant characteristics of these products:

• South Africa focused Fund launches was greatest in 2003 and continued in the above average by 2006, but has declined while the liquidations of cow's milk added in 2010.
• Mena Fund launches peaked in 2006 and 2007, followed by the above, average liquidation in 2009. New launches have not been near the pre-2008 prices.
• Pan-Africa funds is a relatively new group, with the launches were originally ursprungshalten 2007 and again reaches a high 2010.
• Compared to MENA focused resources, South Africa and the Pan-African agents had minimal shutdowns after the financial crisis.
• The majority of MENA funds operated by the arab States and South Africa running out in South Africa funds, but the majority of the Pan-Africa funds operated out of London.

Total assets levels
HFN has not historically tracked assets and routes for Pan-Africa and South Africa focused means of MENA. In addition, estimates the AUM below for funds which invest mainly in the regions and the total hedge fund AUM invested in the region. Total AUM hedge fund invested in the region is probably much higher because of the multi-regional emerging market funds, including investing:

• Mena focused funds AUM peaked in Q2 2008 nearly 10 billion dollars. The Summit was concurrent with high total hedge fund industry AUM, while supply decline after the financial crisis was more dramatic and recovery slower. MENA Fund AUM reached a low of less than 4 billion dollars in Q1 2009, and is now only slightly larger.
• Investor reactions to civilian uprising in the MENA region was net redemption 2011. Redemption from MENA focused strategies speeded up in March and April 2011 peaked.
• South Africa focused funds had approximately 3.27 billion dollars in AUM at end of May. Investor redemption passed appropriation during the first three quarters of 2010, but the trend seems to have reversed in 2011, but the growth has been slow.
• Pan-Africa focus Fund AUM reached estimated 977 million dollars at the end of May 2011. Despite good performance relative to industry in 2010, there were net redemption during the year. Core growth in 2011 is 2.8 per cent, which is slightly lower than average in the industry.

Correlation of returns
Figure 6 shows the relationship between monthly for MEA focused funds to other regional and country specific emerging market HFN indices and relevant equity benchmarks for three specified time frames. Information is useful to compare historical relationships and how they have changed.

• South Africa focused funds have historically had a low correlation to the country's stock markets. The ratio has been reversed in the last 12 months.
• Mena focused funds historically had low but positive correlations to other emerging markets and regional equity benchmarks, but these correlations increased and be high after the financial crisis.
• Pan-African Fund correlations have been added during the financial crisis, but has fallen back in recent months, but they still remain above historical levels.
• Mena fund performance resembles most closely that traditional emerging markets, while the Pan-Africa and South Africa funds tend to be less correlated. This illustrates the different growth stories in Africa and the larger emerging markets which are more closely related to the buy-out market influences.

Compared to other emerging markets
The table below, Figure 7 and 8 and the table at the bottom of the report, compare the returns from Mea funds to emerging market hedge fund HFN indices and regional equity indices.

• Since 2001, South Africa focused funds crisis management MSCI South Africa Index during the down months only once, the best against the record in the three groups.
• The average outperformance in the index, with South Africa funds down months since 2001 is more than 700 points. The average underperforming during positive index is slightly worse months than 450 bps.
• In the past two years, South Africa funds have seen their average outperformance in equity benchmark down months decreased and have also seen underperforming during index up months from worsening.
When comparing historical returns the last two years, only MENA resources has continued to produce returns with greater average outperformance in equity index benchmark down months than average underperforming under benchmark up-months.

Middle East and Africa UCITS products and funds of funds
HFN can create benchmarks for further subclassification of MEA products that meet the standards set out in the directive on UCITS funds of funds investing in the region.

Forward
Investors ' interest in funds focused on the markets of the Middle East and Africa have been below average for the year 2011, which is a clear indication investors aren't comfortable with the current social and political climates in the region. Outside of South Africa, has so far shown decision performance wise. In hedge fund space there is a history of the returns covered by investors who recognizes emerging opportunities sooner than the rest. The last known example is in based security after the financial crisis.

There are a number of reports from the Oakland Institute require attention for private investments, including hedge funds and other institutional investors, in soil in Africa with an eye on the development of agriculture. Reports that raises the questions of the extent to which government interests adapt to the local population and to long-term best use of land, but the existence of the research is evidence of potentially profitable opportunities in these markets. Still, there will always be political uncertainty and given the effectiveness of the insurgency in northern countries, there is still a high risk to invest in the region. In addition, it is important to remember that past performance has proven that the MENA and Pan-Africa focused funds showed high correlation to developed markets in times of global stress.

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Hedge funds focus on New Jersey teachers

New Jersey-based hedge fund managers David Tepper and Alan Fournier has created a new non-profit organization that wading into the emotionally charged arena of the State's public education system.

Better education for children was launched (B4K), based in New Brunswick, earlier this month by Tepper, founder of 16 billion dollars the Appaloosa management and Fournier leading Pennant Capital Management, which has about 3 billion dollars in assets under management.

The objectives of B4K, however, has put it at odds with the New Jersey Education Association, the State's major teachers Union, according to an article in the Wall Street Journal.

B4K advocates for tying tenure to teacher evaluation and elimination of seniority in teacher-hiring decisions in the New Jersey public schools, among other things.

An estimated 112,000 teacher teaches over 1.3 million students in 2,480 public schools, NJ Department of education data.

B4K has already launched an ad campaign, the journal reported, in order to fight back against NJEA ads criticizing Governor Chris Christie for his attacks on the teacher's Union, as well as cuts in education in the State budget.

Tepper and Fournier has links with Christie due to both its hedge fund company in the wealthy enclave of Chatham, where Christie owns a home. Tepper is also a major aid donor to the community FoodBank of New Jersey, which is also supported by Christie's wife, Mary Pat.

Go to the Wall Street Journal article

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HFN focus strategy report: FX strategies

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Overview: FX strategies

HFN active and inactive databases contains over 200 unique Fund products with a primary investment strategy which focused on foreign exchange markets. Commercial database contains 96 products, of whom 68% are unique with 6 unique products structured as UCITS. This report creates the HFN HFN FX Index to compare these funds.

• The HFN FX Index was + 2.37% in April and + 1.76% of the current year 2011. This compares to + 3.07% YTD for equity hedge fund strategies, + 3.59% for fixed income strategies and + 2.78% for the broad hedge fund industry.
• HFN estimates total hedge fund assets invested in FX strategies was 51.6 billion dollars at the end of the first quarter of 2011.
• April performance from FX strategies was best for more than five years, but early indications for can view group lost most, if not all April's profits.

Performance from FX strategies in April and may enter the aggregated positions from the Group were negative on the US dollar. Of the relationship between monthly FX strategies into one United States dollar vs. basket of currencies index over the past two years was-0.62. There are, however, in the FX universe a diversity of strategies that enable an aggregation of return flows a comprehensive picture of individual success and failure. The rest of the report breaks down FX Strategy ratings to give a better perspective on the returns generated by this sector hedge fund industry.

FX Fund properties
The aggregated qualitative details of FX strategies in HFN database gives an indication of the collective characteristics of FX strategies for the entire industry:

• London is the most common city where FX strategies base its operations; but the majority of FX funds exist in the United States with New York and Chicago's leading locations for Boston.
• The average FX entity has 228.5 million dollars in assets strategy, compared with the average equity strategy 196.5 million dollars and fixed average income strategy size of 443.5 million dollars.
• The majority of the current crop of FX and credit resources was initiated in 2008 while equity fund launches reached the end of 2006 and 2007.
• London and the rest of Europe has a higher concentration of quantitative based FX strategies in the United States, Boston and Chicago have more discretionary based strategies than New York.

Total asset levels and flows estimates
HFN has historically not broken out total asset levels and flows of funds investing primarily in FX strategies. For this report, estimates have been made from FX Fund in HFNS major asset flow test.

• HFN estimates total assets invested in FX strategies at the end of the first quarter of 2011 was 51.6 billion dollars. Total AUM has changed much over the last nine months (since the previous report).
• Performance has increased AUM an estimated $ 580 mm while net investor flows have been negative.
• Investor's represented a net outflow of over $ 700 mm from FX strategies over the last nine months until the first quarter of 2011. Broad hedge fund industry had a net inflow of 110 billion dollars in the same timeframe.
• Early estimates for April indicated meaninful inflow, but performance can lead to a further redemption.

Investors flow data end of 2010, indicated increased interest in FX strategies, but redemption 2011 has so far indicated investors have not been satisfied with the performance. Var asset weighted return for FX strategies + 1.13% in the nine months ending Q1 2011 compared with + 10.20% for the broad hedge fund industry in the same time frame.

Performance by product size and strategy Figure 5 shows the annualized returns for the past 24 months, ranked by percentile for FX strategies compared to several other primary market hedge fund ratings. Asset groups are defined by the Fund $ AUM at period early period to best quantify returns of actual fund size. Figure 6 shows the rolling yields for quantitative vs. discretionary funds.

Of the strategy assets varies a bit. FX devices seem to have a higher concentration of managed accounts, and so actual fund size may not be the best indication of the size of a FX operation.

• Smaller FX funds had a slightly higher median income than larger funds, but larger funds (> $ 100 mm) were meaningfully higher top percentile returns.
• Large FX strategies (or "assets in the strategy ') performed relatively well over the last twelve months (LTM) and current year 2011.
• The FX units, through the strategy AUM, with more than 1 billion dollars, an average of + until 4.45% in LTM and + 5.47.% in 2011. both of the broad hedge fund industry aggregated returns.
• Based on the sectors means that use FX strategies, primary or secondary, it appears that FX Strategy exposure in General has been a drag on performance.
• In recent terms, do not have a meaningful difference between quantitative and discretionary FX strategies, but in the longer term, resources that make it possible for a discretionary power has done better.

Forward
HFN has done studies on investor flow trends and the lining investors chase returns. The Data also show the tendency to get rewarded for chasing yield and rewarded for use from the resources crisis management, at least in the years since the financial crisis. For FX strategies shows the first part of the trend to hold true.

Medium reporting full access streams to HFN who had negative returns 2010 had an average of 19 million dollars cashed in the past nine months and on average 4 million dollars for the year 2011. Those who performed the hedge fund industry 2010 had average net inflows of $ 26.1 million in the last nine months and 10 million dollars for the year 2011. Investors seemed to take a decent decision and. The Group at the bottom is-0.12% in 2011, while the top group is + 3.73%

What this means for FX strategies as a whole, but are not necessarily positive. Given the relatively poor aggregated performance 2011 (only one third of FX funds have performed industry 2011 through April, a figure that is likely to be reduced in May) strategy is likely to reduce in size with money flowing to a select group.

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HFN strategy focus report: FX strategies

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?versikt: FX strategier

HFN aktiv och inaktiv databaser inneh?ller ?ver 200 unika fonden produkter med en prim?r investeringsstrategi som fokuserade p? valutamarknaderna. Kommersiella databasen inneh?ller 96 produkter, 68% som ?r unikt med 6 unika produkter strukturerad som fondf?retag. F?r denna rapport skapas HFN HFN FX Index att j?mf?ra dessa medel.

•Den HFN FX Index var +2.36% i April och +1.76% innevarande ?r 2011. Detta kan j?mf?ras med +3.07% YTD f?r eget kapital Hedgefond strategier, +3.59% f?r fasta inkomster strategier och +2.78% f?r bred hedgefonder.
•HFN uppskattar totala Hedgefond tillg?ngar investeras i FX strategier var 51,6 miljarder dollar i slutet av f?rsta kvartalet 2011.
•April prestanda fr?n FX strategier var b?st i mer ?n fem ?r, men tidigt indikationer f?r kan visa gruppen f?rlorat de flesta, om inte alla Aprils vinster.

Prestanda fr?n FX strategier i April och maj visar de aggregerade st?ndpunkterna fr?n gruppen var negativa p? US-dollarn. Av sambandet mellan m?natliga resultat av FX strategier till amerikanska dollar vs. korg av valutor index under de senaste tv? ?ren var-0.62. Det finns dock inom FX universum en m?ngfald av strategier som g?r en aggregering av returnera str?mmar en helt?ckande bild av enskilda lyckade och misslyckade. Resten av bet?nkandet bryter ner FX strategi klassificeringar till ger ett b?ttre perspektiv p? returnerar skapas genom denna underavdelning av hedgefonder.

FX fondens egenskaper
Aggregerade kvalitativa Detaljer FX strategier i HFN databasen ge en indikation av de kollektiva egenskaperna av FX strategier f?r hela industrin:

•London ?r den vanligaste staden d?r FX strategier basera sin verksamhet. men majoriteten av FX medel finns i USA med New York och Chicago p? ledande platser i Boston.
•Den genomsnittliga FX entitet har 228.5 miljoner dollar i strategin tillg?ngar, j?mf?rt med den genomsnittligt eget kapital strategi 201.2 miljoner dollar och fasta medelinkomsten strategi storlek p? 443.5 miljoner dollar.
•Den majoriteten av den aktuella gr?dan av FX och kredit inleddes i 2008 medan eget kapital fond lanserar n?dde slutet 2006 och 2007.
•London och resten av Europa har en h?gre koncentration av kvantitativa baserat FX strategier i USA, Boston och Chicago har mer sk?nsm?ssiga baserade strategier ?n New York.

Totala tillg?ngar niv?er och fl?den uppskattningar
HFN har historiskt sett inte brutit ut totala tillg?ngar niv?er och fl?den f?r medel som fr?mst investerar i FX strategier. F?r detta bet?nkande, har uppskattningar gjorts fr?n FX fonderna inom HFNS stora tillg?ngar fl?de provet.

•HFN uppskattar totala tillg?ngar investeras i FX strategier i slutet av f?rsta kvartalet 2011 var 51,6 miljarder dollar. Totala AUM har f?r?ndrats mycket under de senaste nio m?naderna (sedan f?rra rapporten).
•Performance har ?kat AUM en uppskattad $580 mm medan fl?den som netto investerare har varit negativa.
•Investors utgjorde ett netto utfl?de av drygt $700 mm fr?n FX strategier under de senaste nio m?naderna fram till f?rsta kvartalet 2011. Bred Hedgefond industrin hade ett netto infl?de av 110 miljarder dollar i den samma tidsramen.
•Early uppskattar f?r April anges meaninful infl?de. men kan prestanda leda till ytterligare inl?sen.

Investerare fl?desdata slutet av 2010 anges ?kat intresse FX strategier, men inl?sen 2011 har hittills angivit investerare inte har varit n?jda med prestanda. Var tillg?ngen v?gd avkastning FX strategier f?r +1.13% i de nio m?nader som slutar f?rsta kvartalet 2011 j?mf?rt med +10.20% f?r den breda Hedgefond industrin inom samma tidsram.

Prestanda genom produktens storlek och strategi Figur 5 visar annualized avkastning under de senaste 24 m?naderna, rangordnade efter percentil f?r FX strategier j?mf?rt med flera andra prim?ra marknaden Hedgefond klassificeringar. Anl?ggningstillg?ngsgrupper definieras av fonden $AUM vid perioden b?rjan av perioden att kvantifiera b?st avkastning genom faktiska fondens storlek. Figur 6 visar rullande avkastning f?r kvantitativa vs. diskretion?ra medel.

Av strategin tillg?ngar skiljer sig n?got. FX enheter verkar ha en h?gre koncentration av hanterade konton och s? verklig fondens storlek kanske inte den b?sta uppgiften om storleken p? en FX operation.

•Smaller FX medel hade en n?got h?gre medianv?rde avkastning ?n st?rre fonder, men st?rre fonder (>$ 100 mm) hade ett meningsfullt s?tt h?gre ?versta percentil avkastning.
•Large FX strategier ("tillg?ngar i strategi") har utf?rt relativt v?l under de senaste tolv m?naderna (LTM) och innevarande ?r 2011.
•Den FX enheter, genom strategin AUM, med mer ?n 1 miljard dollar returneras ett genomsnitt p? +16.45 procent i LTM och +5.47% under 2011. b?de ?ver den breda Hedgefond industrin samlade returnerar.
•Based om de sektorer medel som anv?nder FX strategier prim?rt eller sekund?rt, visas det att FX strategi exponering i allm?nhet har varit en dra p? prestanda.
•In senaste termer, inte har en betydelsefull skillnad mellan kvantitativa och diskretion?ra FX strategier, men p? l?ngre sikt, medel som g?r det m?jligt f?r en sk?nsm?ssig inflytande har gjort b?ttre.

Fram?t
HFN har gjort unders?kningar av investerare fl?de trender och bevisen visar investerare chase returnerar. Data visar ocks? de tenderar att f? bel?nad f?r jagar avkastning och bel?nad f?r anv?nda fr?n medel som krishanteringen, ?tminstone under ?ren efter den finansiella krisen. FX strategier verkar den f?rsta delen av trenden h?ller.

Medel rapportering fullst?ndig tillg?ng str?mmar till HFN som hade negativa returnerar 2010 har haft ett genomsnitt p? 19 miljoner dollar l?ses in i de senaste nio m?naderna och i genomsnitt 4 miljoner dollar ?r 2011. De som visade b?ttre resultat ?n den Hedgefond industrin 2010 hade genomsnittliga netto infl?den av 26,1 miljoner dollar under de senaste nio m?naderna och 10 miljoner USD 2011. Investerare har dykt upp anst?ndigt beslut samt. Gruppen l?ngst ned ?r-0.12% 2011 medan den ?versta gruppen ?r +3.73%

Vad detta betyder f?r FX strategier som helhet, men ?r inte n?dv?ndigtvis positivt. Med tanke p? de relativt d?liga aggregerade prestandan 2011 (endast en tredjedel av FX medel har visade b?ttre industrin 2011 genom April, en siffra som sannolikt kommer att minska i maj om resultat ?n) strategin kommer sannolikt att minska i storlek med pengar till en utvald grupp.

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HFN strategy focus report: Market neutral equity

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Overview: Market Neutral Equity Funds

The HFN active and inactive databases contain nearly 400 unique fund products with a primary investment strategy of investing in equity securities while maintaining a neutral market bias. The active commercial database contains 224 products, 60% of which are unique with 7 of the unique products structured as UCITS.

•The HFN Market Neutral Equity Index was +0.58% in April and +1.71% YTD. Returns have trailed the HFN Hedge Fund Aggregate Index by nearly half and are well below the S&P 1200 Global in 2011.
•HFN estimates total market neutral equity (MNEq) fund AUM of $43.9 billion at the end of April 2011. Market neutral fund AUM has increased 2.6% YTD.
•UCITS compliant MNEq funds have underperformed in recent months. A benchmark created for these funds was +0.32% in April, but -1.19% in 2011.

Performance of MNEq benchmarks perhaps is an incomplete portrait of the funds’ performance in recent years. Typically, MNEq funds are not designed to generate large monthly returns, but rather generate stable returns over time regardless of market movements. When many of these products are put together to form a benchmark, the resulting return stream shows little variance and relatively mediocre returns. In the remainder of this report we look more closely at sources of returns and asset flows to gain a better picture of the varying performance and trends of MNEq hedge funds.

Total Asset Levels and Flows
Market neutral equity funds had above average rates of re-demptions during the financial crisis and Madoff scandal. Allocations rose in 2010, but mediocre performance has again left the group with below average investor interest in 2011.

•Total AUM in MNEq funds was $43.9 billion as of April 2011, an increase of 2.6% in 2011 compared to an increase of 5.5% for the hedge fund industry.
•Investors accounted for a net redemption in April of $100 million and AUM is little changed in 2011 due solely to net investor flows. Performance has accounted for $1.0 billion increase in AUM in 2011.
•Investors have added a net $90 million to MNEq strategies in 2011 for a core growth rate of 0.2% which is well below the industry average of 2.3%.

Investors allocated an estimated $4.8 billion into MNEq strategies in 2010 which translates into a core growth rate of nearly 13%. This trailed only fixed income arbitrage and event driven funds among the larger strategies for the year. It is surprising that in 2011, given the economic environment, MNEq funds have not had more investor interest.

Influence of Performance on Investor Flows
HFN has completed studies of the relationship between past returns and recent investor allocations and for this report we looked more closely at these trends for MNEq strategies.

•The ten fastest growing (highest core growth rates) MNEq funds in 2011 had average returns of +13.8% in 2010. Their combined core growth rate in 2011 through April is 42%. Their average performance in 2011 is +6.2%. All of these factors are above the broad industry averages.
•The ten fastest shrinking MNEq funds in 2011 had average returns in 2010 of +2.0% and a combined core decline of 13% in 2011. Their average performance in 2011 is +0.9%. All of these factors are below the broad industry averages.
•The average 2010 performance of MNEq funds with core growth in 2011 was slightly more than double that of funds with core decline in 2011.

It is evident that prior performance played a key role in investor allocations in 2011. This is encouraging because it implies there is not a general lack of interest in market neutral strategies that resulted in the below average 2011 core growth rates, instead investors were simply less willing to allocate to under-performers in the space.

UCITS Products
There has been greater investor interest in UCITS structured MNEq funds than in non-UCITS products. Not all of the 7 MNEq UCITS products report AUM to HFN, but those that do reported above strategy and industry average growth rates, despite negative average returns in 2011. One fund in this group reported above strategy average (slightly below industry average) performance in 2011 and has also raised the most new capital of the group.

Sub-Sector Performance Breakdowns
The table to the right and the charts on the following page show recent aggregated performance for several sub-classifications and sub-styles of MNEq funds.

•Funds with a market neutral approach to sector specific equity markets have outperformed non-sector specific market neutral strategies.
•Only financial sector market neutral funds have out-performed their directional long/short counterparts in the last twelve months (LTM).
•LTM average annualized standard deviations for each market neutral sector group was a minimum of half that of their directional counterparts. In the case of energy funds, annualized volatility was 1/5th of L/S directional energy.
•Technology sector market neutral funds are the only group to outperform the HFN Aggregate Index in 2011 and also trail their directional brethren by the narrowest margin.
•Funds stating a focus on maintaining beta neutrality have outperformed those which operate a dollar neutral strategy while average returns from dedicated pairs trading funds have lagged both. However, within the pairs classification larger funds have performed relatively well.
•Though the group is small, FoFs focusing on MNEq strategies have underperformed, while those focusing on relative value strategies intended to be market neutral (credit arbitrage, event driven, etc) have performed well.

Breakdown by Region/Country Investment Market
A large amount of MNEq funds choose to focus their strategy in one particular geographical market. The table below has the relative performance across regions compared with the respective regional or country specific hedge fund benchmarks.

Market neutral equity strategies focusing on U.S. and European markets display the similar lagging return characteristics with favorable volatility, but funds focusing outside these markets have had more universally positive results.

•Funds targeting Brazilian markets have been able to produce strong returns, relative to the broad industry, over longer time frames and have outperformed the the more directional oriented HFN Brazil Index in 2011.
•Japan focused market neutral funds appeared better positioned to handle market declines resulting from the natural disaster in March and have outperformed directional Japan funds in 2011.

Going Forward
It appears that investors’ tolerance to remain invested, or allocate to underperforming market neutral equity strategies is low, but the appetite for those able to perform well is healthy. This makes the landscape slightly more difficult for market neutral equity managers because it is essentially against the strategy’s ethos to benefit from any broadly positive market movements, meaning they are less likely to benefit from forces beyond their expertise. However, to the benefit of funds that specialize on specific sectors or smaller investment regions, the trends which may separate winners from losers create more decisive trades, unlike a mega-cap environment where correlations may be greater.

Regardless, there are managers who have been efficient at generating acceptable, relatively low volatility returns across most classifications and they tend to reap the rewards in terms of allocations. However, the line appears finer between success and failure compared to directional strategies where value can be realized over longer time frames.

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