HedgeCo.Net – Reversing a small decline in the fourth quarter of 2005, hedge funds saw inflows totaling $24.04 billion, or 2.17 percent, in the first quarter of 2006, according to data released today by Hedge Fund Research, Inc. (HFR), the leading source of hedge fund information and performance data.

Total industry assets stood at $1.182 trillion dollars at the end of the period. Funds of Funds (FOFs), which had also experienced negative flows in 4Q 2005, saw inflows of $6.4 billion in 1Q 2006. Hedge funds performed well, with the average fund up 5.85 percent in the quarter, according to the HFRI Composite Index, which represents the best quarterly returns since 2Q 2003. The Emerging Markets category led the way in the quarter, up 9.43 percent, with the Eastern Europe/CIS subcategory climbing 15.23 percent. The HFRI Fund of Funds Index was up 4.73 percent on the quarter.

“It was generally a strong quarter for hedge funds, from both a performance and an asset flow perspective,” said Joshua Rosenberg, president of HFR. “The strength of the global equity markets along with dynamic movements in commodities, energy and related securities created a favorable trading environment for a majority of hedge funds.”

Among the largest categories, Equity Hedge, with $359 billion in assets, saw $8.1 billion in new flows and returned 6.46 percent on the quarter. Event-Driven, with $163 billion in assets, had $2.1 billion in new flows and returns of 6.20 percent. On a percentage basis, Fixed Income: Arbitrage was the biggest asset gainer (for strategies with over $1 billion in assets), with flows up 19.5 percent (due almost entirely to a very large start-up in that Sector), or $5.54 billion, to a total of $34.3 billion. Convertible Arbitrage once again saw negative flows, with the category losing 5.10 percent of assets in the quarter, despite positive returns of 4.86 percent during the period.

“With very strong overall performance early in the quarter, we are seeing flows into the industry pick up once again, in contrast to the recent trend of assets remaining on the sidelines,” Rosenberg said.

Other data of interest from the HFR quarterly report:

• Previously popular Real Estate sector funds saw a reversal in fortune during the period, with fund flows falling by 1.24 percent. Total assets stood at $3.07 billion; 1Q returns were a solid 5.46 percent.

• Short Selling was the only strategy to experience negative returns during the quarter, with the average fund down 3.07 percent. Short sellers saw flows fall by one percent, and ended the quarter with $3.2 billion under management.

• Coming off a strong 2005, Energy continued to do well, with the average fund returning 8.52 percent in the quarter. Energy funds took in 7.52 percent in new money, bringing total sector assets to $11.86 billion as of 1Q 2006.

• The Macro strategy saw a substantial drop in flows year-over-year, with just under $100 million in new flows in 1Q 2006, compared to $3.25 billion in new flows in 1Q 2005.

• Healthcare/Biotechnology sectors funds, a small category with just $8.70 billion in assets, experienced the greatest year-over-year change in performance. In 1Q 2005, the strategy lost -5.21 percent; for 1Q 2006, it saw a gain of 8.49 percent.