Ebb and flow of cash plays key role in hedge funds' bets-report

BOSTON Tue Nov 13, 2012 2:49pm EST

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BOSTON Nov 13 (Reuters) - Hedge fund managers are paid to have a view on the markets, but new research shows their positions may be swayed more by the ebb and flow of cash than what they expect markets will do, according to a new research report from Bank of America.

Raising cash has been particularly tough in 2012, in part because returns at hedge funds have generally lagged the broader market, a separate research report showed.

"We found that asset flows may be impacting hedge fund positioning," analysts at Bank of America Merrill Lynch wrote in a report released o n T uesday.

With less than two months before year's end, some hedge funds may not be able to make the kind of bullish bets they would like, in part because the $1.8 trillion industry is facing a year of net outflows, the analysts found.

"Recent asset outflows may prevent long/short funds from raising market exposure going into year-end," they wrote.

The analysts constructed a model that they said has been accurate since the financial crisis. "The current reading is neutral," they wrote.

A separate report issued on Tuesday by BarclayHedge and TrimTabs Investment Research shows that inflows to hedge funds picked up in recent months even as raising capital remained tough due to mostly lackluster returns.

Hedge funds took in $3.4 billion in September, less than half the $7.7 billion they took in during August, the report said.

"The hedge fund industry saw net inflows for the second month in a row in September, which was a notable improvement from earlier this year," said Sol Waksman, founder and president of BarclayHedge.

However, better returns elsewhere are making hedge funds a tough sell these days. "Given that the top-performing equity hedge fund categories cannot seem to outperform a low-cost equity index fund, it's no surprise that investors are avoiding the higher fees of equity hedge funds," said Charles Biderman, founder and CEO of TrimTabs.

While the benchmark Standard & Poor's 500 stock index has risen 10.18 percent since January, the average hedge fund has returned only 4.33 percent through in the first 10 months of the year, according to data from industry research group Hedge Fund Research.

The spread over the last 12 months is even wider, with the hedge fund industry gaining 7.8 percent from October 2011 to September 2012, while the S&P 500 climbed 27.3 percent.

Not surprisingly, the hedge fund industry's biggest winners attracted the most money, the BarclayHedge/TrimTabs report found.

"The top 10 percent of best-performing funds attracted more than $10 billion in net inflows, while the bottom 10 percent of funds saw outflows of $6.4 billion," Biderman said. "The hedge fund industry had net inflows of $49.1 billion from January 2011 to September 2012, which leads us to believe the top funds accounted for 21.4 percent of the hedge fund industry's inflows," he said.

(Reporting by Svea Herbst-Bayliss; Editing by Dan Grebler)