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Investors have been putting money back into hedge funds over the last three months as the worst of the credit crisis appears to have passed, but analysts say a return to the industry's heyday is not likely.
For the first time since December 2007, more money has flowed into hedge funds than has been redeemed for three months in a row, data from HedgeFund.net showed Friday.
In July, investors put $6.7 billion into the risky investment vehicles. That came after a more robust $19 billion inflow in June and $16 billion in May.
The slowdown in July came as investors took "more of a wait and see attitude," said Peter Laurelli, head of hedge fund industry research at Channel Capital Group Inc., which operates HedgeFund.net.
"However, I suspect the July performance may have influenced some of those sitting on the sidelines, and I would expect to see modest positive inflows again in August," he said.
Assets managed by the 7,100 funds in HedgeFund.net's database rose 2.6% in July to $1.84 trillion, driven by strong gains in stock and commodity markets.
Off the lows
The renewed interest comes as the financial markets have rallied broadly from the lows hit in March and the most dire economic scenarios have been largely ruled out.
"Investors in general are becoming more optimistic," said Nadia Papagiannis, a hedge fund analyst at Morningstar. "That's part of why we're seeing inflows now."
May was the first month in which Investors put more money into hedge funds than they pulled out since September 2008, when the collapse of Lehman Brothers sparked a mass exodus from the hedge fund industry.
Still, the amount of money flowing back into hedge funds pales in comparison to the amount pulled out earlier this year.
In April, nearly $60 billion flowed out of hedge funds, which eclipsed the inflows in the following months and contributed to a net outflow of $25 billion for the whole second quarter.
A total of $255.5 billion flowed out of hedge funds during the first three months of the year.
0:00 /2:44The danger of asset bubbles
Looking ahead, investors are expected to continue putting money back into hedge funds, although on a small scale.
"The trend is going to be money flowing into hedge funds," Papagiannis said. "But it's not going to be as strong as it was before the credit crisis."
That's because many hedge funds were stuck holding illiquid assets during the credit crisis, and investors, including large institutional funds, could not access their money when they needed it most.
Now, investors are looking for investment vehicles that offer more liquidity and are shying away from strategies that involve a high degree of leverage, which hedge funds are known for, according to Papaginnis.
Leverage involves using borrowed capital to maximize the return of an investment. But the financial crisis showed that leverage can result in spectacular losses when markets unexpectedly turn.
Still, hedge funds remain a viable option for investors looking for strategies that other vehicles don't offer, Papagiannis said.
An index of economic indicators rose in July for a fourth straight month, in another sign that the recession is bottoming, said a report released Thursday.
The Leading Economic Index rose 0.6% in July, after a 0.8% increase the previous month, according to a report from the Conference Board, which has a membership of executives from around the world.
"The indicators suggest that the recession is bottoming out, and that economic activity will likely begin recovering soon," said Ken Goldstein, economist at The Conference Board, in a prepared statement.
The Leading Economic Index is based on 10 components, six of which increased in July: interest rate spread, average weekly initial jobless claims, average weekly manufacturing hours, index of supplier deliveries, stock prices, and new orders for nondefense capital goods. Meanwhile, readings fell for consumer expectations, real money supply and building permits.
This index reading is the latest sign of a nascent recovery. Earlier this month, the Federal Reserve released a statement that said the economy is "leveling out." The central bank cautioned that activity will remain weak in the near term, but it marked the Fed's most bullish assessment of the economy in more than a year.
And this week the International Monetary Fund's chief economist said the global economic recovery has begun, but cautioned that in order to see sustained economic gains the U.S. needs to focus on exports.
While the battered labor market remains weak, the unemployment picture showed some signs of improvement in July. The Labor Department reported the fewest job losses since August 2008, and the unemployment rate fell for the first time since April 2008.
However, no single indicator marks an official recovery. Only the National Bureau of Economic Research can declare when the recession is over. Because it takes so long to crunch the economic data, the NBER generally doesn't announce the date that a downturn ended until at least several months after the fact.
Oil fell towards $70 a barrel on Wednesday after U.S. government inventory data showed a build in crude stocks and weak economic data raised doubts about oil demand recovery in the world's largest energy consumer.
U.S. light, sweet crude fell 81 cents to $70.61 a barrel, giving away some of the gains that helped oil rise 13% since late last week.
U.S. crude inventories rose more than expected last week as refinery runs eased, while distillate stocks showed a surprise draw, according to weekly data from the U.S. Energy Information Administration (EIA) released on Wednesday.
Crude stockpiles in the world's top consumer rose by 1.7 million barrels in the week to July 31, against forecasts for an 800,000-barrel build as refinery utilization fell by 0.1 percentage point to 84.5%.
"The big build on crude caught some people by surprise and shows overall weakness in the economy and the unwinding of economic optimism. Nothing in the numbers was very bullish," said Phil Flynn, analyst at PFGBest Research in Chicago.
The EIA data followed inventory numbers on Tuesday from the American Petroleum Institute, which showed crude stocks fell 1.5 million barrels last week but gasoline stocks rose by a further 2.1 million barrels.
Oil was already lower before the release of inventory figures as doubts over economic recovery and demand for fuel resurfaced after weak U.S. services sector data depressed stock markets both sides of the Atlantic.
Expectations that a turnaround in the global economy could lift sagging oil demand has helped send crude up from lows below $33 a barrel in December, with energy traders keeping an eye on equities markets for signs of an economic rebound.
Investors were awaiting news from a meeting between trade representatives and Britain's financial powers, the UK Financial Services Authority (FSA) and the UK Treasury, which comes before a third Commodity Futures Trading Commission (CFTC) hearing in Washington over how to rein in speculation.
The UK meeting will discuss market transparency and efficiency, according to the FSA invitation to oil market participants, a copy of which has been seen by Reuters.
Energy traders also were watching an area of thunderstorms in the Atlantic Ocean several hundred miles southwest of the Cape Verde Islands associated with a tropical wave. The U.S. National Hurricane Center said it had less than a 30% chance of becoming a tropical storm.
