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Hedge funds’ return in 2023 almost entirely offset 2022’s losses: Preqin 

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Alternative data provider, Preqin, has published its Preqin Global Report 2024: Hedge Funds, which finds that some segments of the hedge fund market have seen slower growth, while, overall, net fund outflows have persisted in 2023. 

The firm writes that, at the same time, the asset class – in a market defined by high interest rates, inflation and recession fears – has found room to grow this year by providing the downside risk protection that investors seek from it. Preqin analysts suggest this may see the asset class maintain its relevance by holding its allocation percentage in portfolios through 2024. 

 Hedge fund assets find room for growth in tough market conditions  

The hedge fund asset class struggled in 2023, but rebounded from its 2022 performance. It returned 8 per cent on an annualized basis in 2023, which nearly offsets negative returns in 2022. Overall, the global asset class returned just under 0 per cent over the two-year period.  

Hedge fund assets under management (AUM) were estimated at USD4.37 trillion by the end of the third quarter of 2023 – increasing by 5 per cent since 2022, as per Preqin data. Of that nine-month growth, the third quarter of 2023 accounted for the least with USD9.2 billion AUM added, compared to USD111.1 billion in the second and USD72.8 billion in the first quarter. 

Preqin writes that the USD9.2 billion uptick in AUM in the third quarter was led by positive returns in event-driven and relative value strategies, and net inflows to niche funds and Commodity Trading Advisers – funds that advise on the trading of futures contracts. These trends worked to offset a negative quarter for equity funds, which also saw significant outflows.  

Looking at capital flows in detail, the trend of net outflows from the hedge funds has persisted. Over the last five years ending September 2023, the average outflow for negative quarters was USD23.8 billion, while average inflows in positive quarters was USD9.8 billion, showcasing the extent of net outflows overall. 

 Niche hedge fund strategies gain traction 

Despite the trend of net outflows from the asset class, hedge funds have demonstrated they can provide the downside risk protection asked of them by global investors in 2023. 

Moreover, hedge fund strategies such as relative value, macro and niche – notably cryptocurrency-focused and insurance linked securities (ILS) strategies – have proven adept at avoiding market volatility and providing downside risk protection for investors’ capital. The ILS sub strategy was the best performer out of all hedge fund sub strategies in 2023, with an annualised return of 14.4 per cent. 

Hedge funds’ fundraising under pressure in 2024 

 While the asset class showed resilience in 2023, Preqin analysts expect that investors’ over-allocation to hedge funds will put pressure on the latter’s ability to hit fundraising targets in 2024.

US-based investors, which make up the majority of global hedge fund investors, had an average allocation of 16 per cent of total assets as of the third quarter of 2023, compared to a target allocation of 12 per cent. This 4 per cent over-allocation will pose additional challenges to many hedge funds’ fundraising efforts, Preqin analysts predict.

Charles McGrath, AVP, Research Insights at Preqin says: “Hedge funds are going through significant changes. Even as they showed how they can help the larger portfolio, investors still do not seem comfortable with the asset class, as many are pulling capital out of hedge funds at a higher rate than they are committing capital. Industry-wide outflows will continue, but it will not be uniform. Top performers will stand above the fray. While some outflow numbers are glaring, North America is growing as a stronghold for the asset class and will continue to do so.” 

Additional key findings from the Preqin Global Report 2024: Hedge Funds include:   

Capital flows: Net hedge fund capital flows hit USD6.4 billion by the end of the third quarter of 2023, despite USD4.9 billion in net outflows in the third quarter alone. Equity strategies took USD14.8 billion in net redemptions during the quarter. 

Preqin’s All Hedge Fund Index in 2023: By the end of the third quarter of 2023, the index fell by 0.9 per cent, compared with global equities’ fall of 4.3 per cent in the same period. This provided downside protection of investor capital. 

Strategy focus: Global macro remains the largest strategy within hedge funds, with USD1.3 trillion in AUM by the end of the third quarter 2023. Equity strategies were the second largest, with an estimated USD1.1 trillion in AUM by the end of the third quarter this year. 

Niche strategies: Niche strategies represented 2 per cent of total hedge fund AUM in 2023 by the end of September 2023, but demand (net inflows) has more than doubled in recent years. Niche strategies’ AUM has risen from USD41.4 billion in March 2021 to USD86.1 billion by the end of September 2023. 

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