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HFR Kenneth J Heinz

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Hedge fund industry capital up in third quarter

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HFR reports that total hedge fund industry capital rose to a record level in 3Q16, as performance gains offset continued asset outflows which were concentrated in many of the industry’s largest and most well-established managers. 

Hedge fund assets rose to USD2.972 trillion, an increase of USD73.5 billion from the prior quarter. The 3Q16 hedge fund asset level eclipses the previous record of USD2.969 trillion set in 2Q15. The HFRI Fund Weighted Composite Index gained +2.9 per cent in 3Q, concluding the quarter with its seventh consecutive monthly gain, and bringing YTD performance to +4.2 per cent.
 
HFR reports that the record total capital level was partially offset by the fourth consecutive quarter of investor outflows, as 3Q net redemptions increased to USD28 billion, or approximately one percent of total industry capital. This represents the largest quarterly outflow since 2Q 2009 and brings 2016 YTD outflows to USD51.5 billion. Investor outflows and liquidations were concentrated in several of the industry’s largest and most well-established firms; nearly USD22 billion of net capital was redeemed or returned from firms with over USD5 billion AUM. Firms managing between USD1 and 5 billion saw net outflows of USD7.4 billion, while firms managing less than USD1 billion experienced a small net inflow.
 
Total capital invested in Equity Hedge (EH) funds, the industry’s largest concentration of strategy AUM, increased by USD27.6 billion to USD841.6 billion despite investor outflows of USD9.4 billion. EH performance-based asset increases were led by Fundamental Value funds, which grew by USD15.7 billion in 3Q, bringing total sub-strategy AUM to USD461 billion, and representing the largest area of EH sub-strategy capital. Quantitative Directional and Multi-Strategy EH funds received combined investor inflows of USD2.8 billion. The HFRI Equity Hedge (Total) Index gained +4.6 per cent in 3Q, bringing YTD gain to +4.2 per cent.
 
Fixed income-based Relative Value Arbitrage (RVA) strategies also experienced an increase in total assets, with capital rising by USD19.5 billion to USD804 billion. The strategy’s performance-based asset gain was partially offset by investor outflows of USD4.1 billion in 3Q. Total capital invested in RVA: Multi-Strategy funds increased by USD10.5 billion to USD488 billion, the industry’s largest sub-strategy by AUM. The HFRI Relative Value (Total) Index gained +3.0 per cent in 3Q, bringing the YTD gain to +5.7 per cent.
 
Event-Driven (ED) strategies experienced a large net outflow of USD15.4 billion for the quarter, bringing YTD outflows to USD27.4 billion. Despite these outflows, and as a result of strong performance, total capital in ED increased by USD19.4 billion to USD762.4 billion in 3Q. ED outflows were concentrated in Special Situations, which experienced net outflows of USD7.5 billion, although strong performance gains increased total capital in these funds to USD356.7 billion, the largest ED sub-strategy. The HFRI Event-Driven (Total) Index gained +4.6 per cent in 3Q16 and leads all primary strategies YTD with a gain of +6.8 per cent.

Led by investor inflows of USD2.0 billion into quantitative, trend-following CTA strategies, total capital in Macro hedge funds increased by USD7.0 billion to USD563.6 billion in 3Q. Macro inflows totalled USD800 million in 3Q, with total strategy inflows partially offset by an outflow of USD2.6 billion in Discretionary sub-strategies. The HFRI Macro (Total) Index declined -1.1 per cent in 3Q, paring the YTD gain to +1.6 per cent.
 
“The hedge fund performance environment improved in 3Q, despite investor redemptions, the continued decline in the British Pound Sterling as a result of Brexit, and an uncertain macroeconomic outlook across most regions,” says Kenneth Heinz, (pictured) President of HFR. “Total hedge fund industry capital has reached a record high as the US economy prepares to conclude an extended interest rate cycle which has de-sensitized many investors to risks in financial markets, while suppressing asset volatility and hedge fund performance in recent years. As rates are allowed to normalise, fundamental, mean reversion across many specialized long short strategies is likely to drive strong performance and industry growth into 2017.”

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