HFR: Industry Assets Hit $3.1T As New Capital Inflows Resume

Jul 20 2017 | 9:25pm ET

Assets under management in the hedge fund industry hit its fourth consecutive quarterly record in Q2/17, reaching $3.1 trillion as investor allocations outweighed redemptions for the first time since the third quarter of 2015.

Industry capital increased by $34.1 billion during the quarter, according to new data from Hedge Fund Research, driven by net inflows of $6.7 billion which offset outflows of $5.5 billion in 1Q17 to bring YTD net flows to a positive $1.2 billion.

The metrics suggest hedge funds are returning to favor after a bruising several-year period in which disappointing performance and high fees cast a shadow over the asset class in the minds of many investors. However, returns have been looking up: HFR’s HFRI Fund Weighted Composite Index posted its eighth consecutive monthly gain in June, and its fifteenth gain in the past 16 months, to end the second quarter - the longest winning streak since the spring of 2004.

Asset flow highlights by strategy, according to HFR:

  • Investor inflows were led by quantitative, trend-following global macro strategies, which typically exhibit low correlation to equity markets and other hedge fund strategies, and trade globally across fixed income, equities, commodities and currencies. Investors allocated $5.2 billion to macro strategies in 2Q17, bringing the 1H17 inflows to $6.0 billion and total capital in Macro to $579.2 billion. 
  • Macro sub-strategy inflows were led by Systematic Diversified/CTA strategies, which received $3.1 billion in new capital, bringing the 1H17 net inflow to $7.9 billion. The HFRI Macro Index (Asset Weighted) posted a narrow gain of +0.04 percent for 1H17, though the HFRI Macro: Currency Index jumped +6.7 percent in the first six months of 2017.
  • Equity Hedge (EH) strategies received net inflows of $3.8 billion in 2Q17, bringing total EH capital to $893.8 billion, the largest strategy area of industry capital. Investor inflows into EH sub-strategies were led by Multi-Strategy and Quantitative Directional, which received $5.0 and $2.1 billion, respectively, extending 1H17 inflows to $5.3 and $3.9 billion. These were partially offset by strategic rotation out of Fundamental EH sub-strategies, with Fundamental Value and Growth experiencing outflows of $2.8 billion and $800 million, respectively, bringing 1H17 outflows to $5.6 and $4.5 billion.
  • Investors also allocated to fixed income-based Relative Value Arbitrage (RVA) strategies, with these receiving $1.6 billion of net new capital in 2Q1, partially offsetting the $5.4 billion outflow in 1Q17. RVA sub-strategy inflows were led by Fixed Income Corporate and Asset Backed, which saw inflows of $1.8 and $1.5 billion, respectively. These offset an outflow of $2.6 billion in RVA Multi-Strategy, bringing total capital invested in RVA strategies to $827 billion, the industry’s second largest area of capital. HFR’s HFRI Relative Value (Total) Index, which gained +2.7 percent in the first half, has posted 16 consecutive months of positive returns.
  • Event-driven (ED) strategies experienced an outflow of $3.8 billion in 2Q, offsetting an inflow of $3.5 billion from 1Q17, and bringing total ED capital to $800 billion. ED sub-strategy outflows were led by Special Situations, which experienced a net redemption of $2.2 billion; small outflows across other ED sub-strategies were only partially offset by a minor net inflow into Merger Arbitrage. 
  • Capital flows by firm size were led by the industry’s largest firms for the first time since 4Q15, with firms managing greater than $5 billion receiving inflows of $4.3 billion, partially offsetting the 1Q17 outflow of $5.7 billion. 

“Investors increased their allocations to hedge funds in 2Q for the first time in six quarters, with a strategic emphasis on non-directional and equity beta-reducing exposures, credit and multi-strategy sectors that offer protection against rising rates, and larger, well-established fund managers,” stated Kenneth Heinz, president of HFR, in a statement. “While the capital raising environment has improved, it remains challenging with low implied and realized volatility creating a performance-moderating headwind for managers. 

“Allocation trends reflect the forward-looking nature of investors, focusing on quantitative and trend-following strategies, despite these not being top performing areas, as well as on equity and fixed income beta-reducing exposures,” he added. “It is likely that funds which navigate this low volatility environment, and which tactically position for surprise surges in volatility, will lead industry growth in 2H17.”

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 more than 100 indices ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.

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