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On May 20, 2010 with 3,080 hedge fund products reporting performance, the HFN Hedge Fund Aggregate Index was +1.22% in April 2010 and +3.94% year-to-date (YTD). The S&P 500 Total Return Index (S&P) was +1.58% in April and +7.05% YTD.

Hedge Fund Industry Highlights:
• Total industry assets increased an estimated 1.62% to $2.299 trillion in April. Net investor flows were positive, but the rate of growth declined for the second month in a row.
• Small cap strategies outperformed all others in April, but long/short equity trailed fixed income strategies during the month.
• More than half of HFN strategy specific benchmarks ended April at all-time peak levels and three others are within 100 basis points of regaining peak levels.
• Strategies with lower beta to equity markets, including merger arbitrage, market neutral equity and fixed income arbitrage, attracted assets at a higher rate in April.

Hedge fund performance in April was broadly higher, however for the first time in several months performance was not dominated by equity focused strategies. Mortgage related strategies performed above average, as did event driven and distressed. Short biased strategies continued to perform relatively poorly, but May looks like it will be a strong month for the group.

Small cap and value focused strategies are the two best performing groups of funds in 2010. Their respective indices are +12.14% and +10.37% YTD; the only strategy specific benchmarks with double digit positive returns in 2010. Besides short bias funds, no other single strategy benchmark is down for the year. April performance pulled CTA/managed futures funds into positive territory. Statistical arbitrage, market neutral equity, global macro and multi-strategy benchmarks have all produced below average 2010 returns through April.

Regional Overview
Aggregate emerging market returns did not outperform in April for the first time in three months. Funds investing in Russia and India performed best, however the surprise, from a regional standpoint continued to be funds investing in Japan. The HFN Japan Index was +2.77% in April and +9.12% in 2010. Only Russia has produced better country specific exposure and only Middle East/North Africa has produced superior returns on a regional level.

HFN tracks performance and assets of 150 fund products which invest primarily in Japanese markets, of which 72 are unique funds. The vast majority are equity focused managers with an average and median fund size of $91.17 million and $44.00 million, respectively. Total $AUM of the Japan funds in the HFN database is close to $6 billion. Fewer than 15% of the funds are actually located in the country with the majority based in Europe, mostly in the U.K.

Brazil and China focused funds continued to be a drag on aggregate emerging market returns and are the only two regional or country specific classifications with negative average performance in 2010. Funds investing in both countries have been faced with declining equity markets in 2010. The good news is the average Brazil and China focused funds are outperforming their equity benchmarks by nearly 400 and 300 percentage points.

Monthly Asset Flow Estimates
• Total estimated hedge fund assets at the end of April 2010 were $2.299 trillion, an increase of 1.62%, or $36.70 billion since March.
• Performance accounted for $33.06 billion of the increase and investor allocations accounted for a net inflow of $3.65 billion; the lowest amount since January.
• The core rate of growth (% asset change due to investor allocations/redemptions) was an increase of 0.16%.

Positive net investor flows cannot be bad news and there is a historical pattern of a slowdown in allocations in the second quarter, compared to the first. The industry has experienced net inflows in eleven of the last twelve months and an estimated $24.58 billion has been added to the industry, outside of performance, in the first four months of 2010.

Severe net investor outflows due to the financial crisis ended in April 2009. Since then, there has been one month of net investor outflows (December 2009) and one month of total industry asset declines (January 2010). The industry remains $637 billion below its peak set in Q2 2008.

April sub-Sector Specific Flows
• Funds domiciled in Europe had the highest rate of core growth in April while funds domiciled in the U.S. and Asia both had aggregate net investor outflows during the month, for the second month in a row.
• Equity strategies had the highest rate of core growth in April, however slower than the prior two months. There was a net outflow from mortgage bond related strategy for the second straight month.
• Merger arbitrage had the highest rate of sub-strategy allocations in April followed by market neutral equity. Emerging markets had net inflows slightly above average and stat arb, CTA/managed futures and distressed funds had cumulative net outflows.

April Performance Review
Fixed Income (FI) Strategies
• The average of all fixed income focused strategies was +1.68% in April and the group is +5.81% YTD.
• As has been the case for the last several months, performance was best from funds with exposure to mortgage and distressed securities, including a mix of the two.
• Fixed income fund assets rose an estimated 2.71% to $537.04 billion. Investors added a net $2.24 billion in April.

Equity (EQ) Strategies
• The average of all equity focused strategies was +1.31% in April and the group is +4.51% YTD.
• Finance and tech sector funds performed best and healthcare focused funds lagged, though all sub-sectors were positive.
• Equity fund assets rose an estimated 1.94% to $750.76 billion. Investors added a net $6.39 billion in April.

Commodity and Foreign Exchange (FX) Related Strategies
• Broad natural resource commodity strategies were +1.25% in April and +0.41% in 2010.
• Agriculture focused funds supported the group as funds investing in metal and oil were negative in April.
• FX strategies were mostly positive at +0.71%, while financial futures focused strategies lagged returning +0.23%.

Summary Analysis and Going Forward
Major equity markets are down significantly in May and it is likely that the industry will see its first negative month since January and only its third in the last fourteen months. The industry has outperformed the S&P 500 significantly in each of the two prior negative months, but May will be a test. There may have been some severe impacts from the “flash crash” and with the S&P down nearly 8.5% MTD at the time of writing, there will likely be some heavy losses. A month like this may put many managers back under or deeper under their high water marks and may lead to another wave of fund liquidations. Hopefully the tone will be towards the industry’s ability to outperform in down markets. Click here to read the full report.