HFR: Hedge Fund Industry Assets Recover in Q2/16 Despite Net Redemptions

Jul 20 2016 | 9:44pm ET

Hedge fund assets increased during the second quarter of 2016, reversing declines in the first quarter and rising above year-end 2015 levels, according to Hedge Fund Research’s latest HFR Global Hedge Fund Industry Report

HFR said the industry navigated volatility and dislocations related to Brexit in late 2Q to post asset gains for both the second quarter and the first half, with total hedge fund capital rising to $2.898 trillion as of June 30. The tally is an increase of $42.06 billion during the quarter and is the third-highest quarterly capital total on record. 

However, the gain in assets was entirely due to performance gains. The HFRI Fund Weighted Composite Index gained +2% in 2Q, while investor redemptions totaled a net $8.2 billion. Although nearly half the level of redemptions seen in 1Q, it was still the third consecutive quarterly outflow for the industry. 

The current capital level was only surpassed in the first and second quarters of last year when capital peaked at a record $2.969 trillion before trailing off at year-end. 

Key highlights from HFR’s report:

  • Event Driven (ED) led all hedge fund strategies in capital increases in the quarter. Performance-based gains drove total ED capital to $743.1 billion, a quarterly increase of $13.1 billion, as the HFRI Event Driven Index gained +2.8% in 2Q16. However, ED experienced net investor outflows of $3.5 billion in the quarter, concentrated in Special Situations and Distressed/Restructuring sub-strategies, though these were partially offset by net inflows into Merger Arbitrage and ED: Multi-Strategy funds. 
  • Fixed income-based Relative Value Arbitrage (RVA) strategies posted similar performance-driven asset gains in 2Q, as the HFRI Relative Value Index added +2.9% in the quarter, vaulting total RVA capital to $784.4 billion, nearing the record level of RVA capital set in 2Q15. Investors redeemed a net $1.6 billion from RVA hedge funds in 2Q, paring the 1H16 inflow for the strategy to $3.7 billion. By sub-strategy, 2Q outflows were led by redemptions from FI: Asset-Backed and Convertible Arbitrage funds, while first half 2016 inflows were led by FI: Sovereign and RV: Multi-Strategy hedge funds. 
  • The HFRI Macro Index gained +1.68% in 2Q, increasing total capital invested in Macro strategies to $557 billion, its highest asset level since 1Q15. Macro hedge funds experienced a net investor outflow of $2.6 billion in 2Q, although this represents nearly a two-thirds decline from the $7.3 billion redeemed in the prior quarter. By sub-strategy, capital in Systematic Diversified/CTA funds rose to $270 billion, also its highest asset level since 1Q15, on quarterly inflows of $1.4 billion; these were offset by outflows in Discretionary strategies. 
  • Interestingly, macro strategies led all hedge fund performance in 1H16 on strong Brexit market reaction, HFR noted, as the HFRI Macro Index gained +3.3%, while the HFRI Macro: Systematic Diversified/CTA Index added +4.1%. 
  • Hedge fund capital invested in Equity Hedge (EH) funds, the industry’s largest strategy area by capital, rose to $813.9 billion in 2Q, an increase of $7.5 billion from the prior quarter, though total EH assets remain below the YE 2015 level of $829 billion. EH strategies experienced a modest outflow of $345 million in 2Q16, bringing total 1H16 outflows to $5.0 billion. Investors allocated $2.4 billion of net new capital to Equity Market Neutral funds in 2Q, bringing 1H inflows to $5.0 billion for this sub-strategy, though these were offset by outflows from Fundamental strategies over the quarter and entire first half of 2016. The HFRI Equity Hedge Index gained +1.4% in 2Q, though the index remains down -0.4% YTD through June. 
  • Capital flows in 2Q were propelled by several large fund liquidations, resulting in a net outflow to the industry’s largest firms (firms with greater than $5 billion in AUM) of $4.4 billion. Firms managing between $1 and $5 billion experienced a similar outflow of $4.01 billion, while approximately $360 million of net new capital was allocated to firms managing less than $1 billion. 

“Hedge fund industry growth accelerated in 2Q, posting the strongest quarterly asset growth since the first quarter of 2015, driven by strong quantitative CTA gains on Brexit Friday and broad-based industry wide gains across equity, commodity and currency markets pursuant to the Brexit dislocations,” said Kenneth Heinz, president of HFR, in a statement.

“Institutional investors are actively seeking exposures which preserve capital, generate positive carry, provide opportunities during market dislocations, and assist them in achieving their respective required rates of return on capital," Heinz added. “Hedge funds which have demonstrated these are likely to attract new investor capital and lead industry growth through a likely volatile 2H16."

Established in 1992, HFR produces the HFRI, HFRX and HFRU Indices, industry benchmarks for global hedge fund performance. HFR calculates over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.

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