HFR: Hedge Fund Industry AUM Crests $3T To End 2016

Jan 20 2017 | 9:12pm ET

Total assets in the hedge fund industry set a second consecutive quarterly record to end 2016 and crested the $3 trillion mark for the first time, according to new data from Hedge Fund Research.

The fourth quarter of 2016 was also the third straight period in which total capital rose, HFR said. Total assets increased by $46.8 billion in 4Q16, ending the year at $3.02 trillion, while for the full year, total hedge fund industry capital increased by $121 billion, the largest annual increase since 2014.

The findings were included in the latest edition of HFR’s Global Hedge Fund Industry Report.

The growth in assets is especially noteworthy given the tremendous level of investor redemptions last year, HFR said. The overall hedge fund industry saw total outflows of $70.1 billion in 2016, the largest since the financial crisis in 2009, $18.7 billion of which came in the fourth quarter. Positive performance across a broad array of strategies accounts for the net increase in industry AUM.

Highlights of HFR’s analysis of fourth-quarter and FY2016 asset flows:

Led by performance-based gains, Event Driven (ED) strategies led asset growth in 4Q, with these funds increasing by $14.8 billion to $777.2 billion; for 2016, total capital invested in ED increased by $32.4 billion. The HFRI Event-Driven (Total) Index led strategy performance for 2016 with a gain of +10.5 percent, driven by Distressed, Activist and Special Situations exposures. Despite this, investor withdrawals from ED strategies continued, totaling $10.8 billion in 4Q and $38.2 billion for 2016, leading strategy outflows over both time periods. ED sub-strategy outflows for FY16 were concentrated in Special Situations at $18.7 billion, which were only partially offset by inflows of $2.1 billion into Merger Arbitrage.

Also driven by strong performance, fixed income-based Relative Value Arbitrage (RVA) strategies saw the largest asset increase for FY 2016, with total RVA capital up $12.9 billion in 4Q and $43.9 billion for FY16 to end the year at $816.8 billion, the industry’s second largest strategy by assets. The HFRI Relative Value (Total) Index gained +7.8 percent for 2016, the strongest gain since 2012, led by Yield Alternatives and Corporate Fixed Income exposures. RVA experienced modest capital outflows for 4Q and FY16, totaling $1.4 and $1.7 billion, respectively. RVA net asset flows by sub-strategy in 4Q were led by inflows of $1.6 billion into Corporate Fixed Income, which were partially offset by withdrawals of $865 million from Asset Backed exposures.

Capital invested in Equity Hedge, the industry’s largest strategy area by capital, increased by $7.5 billion in 4Q and $20 billion for FY16, rising to a record $849 billion. The HFRI Equity Hedge (Total) Index gained +5.5 percent for 2016, led by exposures to Energy/Basic Materials and Fundamental Value strategies. However, investors withdrew $6 billion from Equity Hedge funds in 4Q and $20.5 billion for 2016, with FY outflows by sub-strategy led by Fundamental Value strategies, which experienced $17 billion in outflows, and Fundamental Growth strategies, which saw $11 billion in outflows. These were only partially offset by inflows into Quantitative Directional strategies of $4.7 billion and Equity Market Neutral of $3.9 billion.  

Total capital invested in Macro strategies increased by $11.6 billion in 4Q and $25.4 billion for FY16, finishing the year at $575 billion. The HFRI Macro (Total) Index gained +1.3 percent in 2016 despite posting positive performance through periods of market stress in January and June; Macro sub-strategy performance was led by Commodity and Active Trading sub-strategies. Macro experienced a narrow outflow of $497 million for 4Q, including a large sub-strategy rotation in which investors allocated over $6.0 billion of capital to quantitative, trend-following CTA strategies, while redeeming nearly the same amount ($6.0 billion) from fundamental, discretionary strategies. For 2016, investors withdrew a total of $9.7 billion from Macro strategies, with sub-strategy outflows led by $16.3 billion of redemptions from Discretionary Thematic strategies, partially offset by inflows of $6.6 billion into Systematic Diversified CTA strategies.

Outflows by firm size were distributed across capitalizations, with the withdrawals from the largest firms (>$5 billion AUM) falling from the prior quarter, while withdrawals from $1-5 billion AUM firms increased. Investors withdrew $5.6 billion from firms managing greater than $5 billion in 4Q, falling from $21.8 billion in 3Q and totaling $42.6 billion of outflows for 2016. Investors withdrew $10.0 billion from firms managing between $1-5 billion in 4Q, with withdrawals from these totaling $25.1 billion for FY16. Investors withdrew $3.1 from firms managing less than $1 billion in 4Q, with outflows to these totaling $2.4 billion for 2016.

“Hedge fund assets surpassed a historic milestone to conclude 2016, as the industry posted the strongest asset increase in two years through the political turmoil of Brexit and the US Presidential election,” stated Kenneth Heinz, president of HFR. “Growth occurred against a backdrop of mixed withdrawals, as investors and institutions positioned for continued geopolitical and economic uncertainty in 2017. With global equities near record highs and U.S. interest rates beginning to rise, funds tactically positioned for this environment are likely to benefit from these developments and lead industry performance in 2017.”

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

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