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HFR Kenneth J Heinz

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Hedge fund capital flows mixed as equities eclipse record

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Hedge fund capital began Q4 2018 at a new record level for the ninth consecutive quarter as investors continued the Q2 redemption trends from Macro, Event-Driven, and Relative Value strategies, while Equity Hedge strategies also experienced small outflows in Q3 2018.  

Despite investor outflows, hedge fund performance drove total industry capital to a net increase of USD8.4 billion, ending the quarter at a record USD3.24 trillion, according to the latest HFR Global Hedge Fund Industry Report.
 
Following the USD3.1 billion net outflow in Q218, investors redeemed an estimated USD9.1 billion in Q3 2018, the second consecutive quarter of net outflows. For the year, investors have redeemed an estimated USD11.1 billion (0.34 per cent) of hedge fund industry capital, though total hedge fund assets have increased by USD34.4 billion (1.0 per cent).
 
The HFRI Fund Weighted Composite Index® (FWC) gained 0.55 per cent in Q3 2018, with strong performance from Technology and Event-Driven strategies partially offset by volatility associated with expectations for higher US rates, as well as trade and tariff volatility in late Q3. The HFRI FWC has gained 1.4 per cent YTD through September while the HFRI Asset Weighted Composite Index has advanced 1.7 per cent, topping most European and Asian equities, though trailing the S&P 500.
 
Continuing the trend of the prior quarter, Macro hedge funds led strategy outflows in Q3 2018 with an estimated net outflow of USD3.8 billion, as investors rotated out of quantitative, trend-following CTA and Discretionary Thematic strategies. The HFRI Macro (Total) Index posted a narrow decline of 0.03 per cent in Q3, bringing the YTD performance through September to a decline of -1.8 per cent. The muted quarterly performance and net outflows reduced total Macro capital to USD589.2 billion.
 
Reversing a trend from the prior quarter, Equity Hedge (EH) strategies experienced a small outflow for Q3 2018 despite leading hedge fund industry performance in the quarter, with strong returns concentrated in specialised Technology and Healthcare funds. Although investors redeemed an estimated USD2.0 billion from EH strategies in the third quarter, performance drove total EH capital to USD955.0 billion, the industry’s largest strategy capital area. Quantitative Directional funds led EH sub-strategies with a net inflow of USD1.1 billion, although this was offset by an outflow of USD1.8 billion in Fundamental Growth strategies.
 
The HFRI Equity Hedge (Total) Index gained 0.5 per cent in Q3 2018 and 1.7 per cent YTD through September, while the HFRI Equity Hedge (Asset Weighted) Index posted a higher return of +2.54 per cent YTD. EH sub-strategy performance for the year has been led by the HFRI EH: Healthcare Index, which has surged 14.9 per cent, leading all sub-strategy indices and topping the Russell 2000, S&P 500 and DJIA Indices, while the HFRI EH: Technology Index has jumped 11.5 per cent YTD.
 
Despite investor outflows in both Event-Driven (ED) and Relative Value Arbitrage (RVA) funds, total capital in each strategy increased on Q3 performance. ED capital rose by USD2.4 billion in Q3 to USD847.1 billion, as the +0.8 per cent return of the HFRI Event-Driven (Total) Index offset net redemptions of USD2.4 billion. For the year, the HFRI ED Index has gained 2.8 per cent, trailing only the HFRI Relative Value (Total) Index YTD return of +3.0 per cent in main strategy performance. Also mirroring trends industry-wide, larger ED funds have outperformed smaller funds on a relative basis for the year, as the HFRI Event-Driven (Asset Weighted) Index has advanced 4.1 per cent YTD. Similarly, capital invested in RVA strategies increased by USD4.8 billion to USD853.0 billion in Q3 despite a small quarterly outflow of approximately USD880 million. The HFRI Relative Value (Total) Index added 1.3 per cent in Q3 2018, increasing its YTD performance to +3.0 per cent, while the HFRI Relative Value (Asset Weighted) Index returned +1.5 per cent in the quarter and +3.6 per cent YTD.
 
Net asset flows by firm size were dispersed across firms within each AUM tier in Q3 2018, as firms with greater than USD5 billion AUM experienced outflows of USD5.2 billion, while mid-sized firms (USD1-5 billion AUM) saw outflows of USD2.5 billion. Investors redeemed an estimated USD1.2 billion from firms managing less than USD1 billion. For the year, the largest firms have experienced an estimated net outflow of USD9.3 billion, mid-sized firms have seen outflows of USD2.3 billion, while firms managing less than USD1 billion have recorded a small net inflow of USD600 million.
 
“Total hedge fund capital increased to a record despite a modest investor outflow as US financial markets began Q4 2018 near an inflection point in interest rates, economic growth and equity market valuation,” says Kenneth J Heinz (pictured), President of HFR. “Critical drivers of investor allocation trends have expanded from performance and asset under management to also include an intense focus on fees, liquidity, firm management, European credit risk, social responsibility, and interest rate risk factor sensitivities. Funds which are able to position for and navigate this shifting transitional inflection point in financial markets are likely to lead industry performance and growth into 2019.”

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