CHICAGO � July 27, 2005 � The hedge fund industry continued its growth in the second quarter of 2005, with $10.9 billion in new fund flows coming in, according to data released today by Hedge FundResearch (HFR), the leading source of hedge fund information and performance data. Total industry assets now stand at a record $1.025 trillion.

The $10.9 billion in new flows for the 2Q was down significantly from the $27.3 billion in new flows for the first quarter of the year, but up from the $7.5 billion in new money raised by the industry in 2Q 2004. Convertible Arbitrage continued to be the biggest loser, dropping $4.15 billion in assets for the quarter, bringing total losses in the strategy to $5.1 billion in assets year to date, or a 15% loss of assets since the beginning of the year. Macro and Equity Hedge funds saw some of the greatest inflow, both attracting $3.2 billion in new money for the quarter. Macro has brought in $6.5 billion year to date, while Equity Hedge attracted $7.4 billion.

�We are seeing a decline in fund flows from what was a near record level in the last quarter. With moderating returns and generally difficult market conditions, hedge fund investors are clearly being cautious about allocating new funds to the industry,� said Joshua Rosenberg, president of HFR.

Returns for the second quarter were modestly positive, with the average fund tracked by HFR gaining 1.14%, and 1.89% year to date, compared to gains of 1.37 % and -0.81 % for the Standard & Poor�s 500, and -0.20% and -1.75% for MSCI World Index during the same periods.

Rosenberg noted that there were several significant new fund launches in the period. At the same time, there were a number of high-profile fund liquidations, while several well-known funds suffered outflows due to concerns over poor returns. �The continued poor performance in Convertible Arbitrage was another significant contributor to slowing growth for the quarter, with this strategy alone seeing more than $4 billion in outflows,� Rosenberg added.

Other data of interest from the HFR quarterly report:

Event Driven saw a substantial drop in quarter-over-quarter flows, from nearly $6 billion in 1Q to $2.5 billion in 2Q. It continued as the largest dollar gainer for the year, with an $8.4 billion gain assets.
Relative value arbitrage saw an outflow of assets on the quarter, dropping from positive flows of $4.6 billion in the first quarter to a loss of $200 million in the second quarter, as returns fell from a positive 0.72% to -0.33%.
Fund of Funds saw both flows and performance decline compared to 1Q 2005. Flows dropped to $3.5 billion in 2Q from $9.4 billion, while 2Q returns fell to 0.29% from 0.80%. Total assets in the Fund of Funds category currently stands at $375 billion, representing approximately 37% of total hedge fund assets.
Energy funds again saw major capital inflows, with total assets increasing by $1 billion in the quarter, or nearly 18%, to $7.7 billion. Returns for the sector were 2.31%, more than double the industry average, but down from 7.08% in Q1. Total sector assets stood at just under $8 billion, representing a 63% increase year to date.
Funds focusing on Emerging Markets/Eastern Europe were the top performers year to date, up 12.71%, and the second-best performers for 2Q, climbing 3.68%.
Equity Hedge remained the single biggest strategy, with $299 billion in assets, or nearly one-third of the industry total, followed by Event-Driven with $140 billion in assets under management.

About HFR

Chicago-based HFR Group L.L.C., founded in 1993, is one of the global leaders in hedge fund data, research, indexation and asset management. The HFR Group companies include Hedge Fund Research, Inc., and HFR Asset Management L.L.C. Hedge Fund Research produces HFR Database, considered to be the definitive source of hedge fund performance and information. HFR also distributes the HFRI Monthly Performance Indices � the premiere benchmarks for the hedge fund industry. With $4 billion in assets under management, HFR Asset Management offers a range of hedge fund investment products: Investable Indices, Funds of Funds, single-manager funds and customized multi-manager funds.