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From Staff Reports
A research report that concluded that $32 billion flowed out of hedge funds in July – leading analysts to think the controversial investment vehicles were a major cause of the global credit crisis that started in August – was wrong, the two firms that issued the report admitted yesterday (Wednesday).
TrimTabs Investment Research and the Barclay Group, the two firms that compiled the report, said the July estimate was calculated incorrectly and apologized. The new data suggests that the impact on the $1.9 trillion hedge fund business wasn't as bad as some had feared. Rather than a net $32 billion leaving hedge funds in July, a net $39.1 billion flowed into the sector that month, the two firms said.
In August, TrimTabs and Barclay Group estimated that hedge funds had $8.9 billion worth of inflows.
"We apologize for the incorrect hedge fund flow estimates for July," said Charles Biderman, chief executive officer for TrimTabs. "The monthly hedge fund flow data is a new service and the changes we made to our methodology will ensure that our current and future estimates are as accurate as possible."
Because hedge-fund performance had fallen off near the end of July and then soured even more in August as the global credit markets locked up – sparking fears of big hedge-fund redemptions – the July outflow estimates released by TrimTabs and Barclay Group in early September seemed to make sense and were initially accepted. So TrimTabs went as far as saying that the risk-reduction moves undertaken by hedge funds was a key cause of the whipsaw volatility in the stock-and-bond markets as well as the shifting in credit standards globally.
But the firms made two key mistakes in making their calculations, according to MarketWatch.com. The two firms didn’t adjust their estimate to account for the "sub-funds" that many hedge funds use, and whose money flow reports tend to lag significantly. Also, flows were included in the estimates that updated fund performance, but not their assets under management, meaning funds that posted positive returns were incorrectly perceived as posting outflows equal to their asset gains, the two companies said.
Still, since "many investors were probably nervous about putting fresh cash to work until they could assess the fallout from the subprime mortgage mess," the negative impact on hedge funds from the summer credit-market gyrations was clearly visible in the August data the two firms assembled, said TrimTabs President Conrad Gann. The inflow of $8.9 billion for August was the lowest total since January, when $7 billion flowed into hedge funds, the firms estimated. And fixed-income funds posted an outflow of $1.7 billion in August, the firms said.
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Report of Hedge Fund Outflows Was Wrong, Firms Say.