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Relative value arbitrage leads hedge fund capital to new record

Steady inflows and performance-based gains increased hedge fund assets by USD60bn in the fourth quarter, bringing total industry capital to a record USD2.25trn, according to the latest HFR Global Hedge Fund Industry Report. 

Hedge funds posted performance gains in 4Q12, as global financial markets struggled with the political and macroeconomic uncertainty which had adversely impacted performance throughout much of the year, including the European banking and sovereign debt crisis, and the US fiscal cliff negotiations.

The HFRI Fund Weighted Composite Index advanced 1.3 per cent in 4Q, topping the global equity market decline, and bringing full-year 2012 HFRI FWC Index performance to 6.2 per cent. Investors continued to allocate new capital to the hedge fund industry, with net asset inflows of USD3.4bn in 4Q, bringing total 2012 inflows to USD34.4bn.

Full year performance gains and capital inflows by strategy were led by fixed income-based relative value arbitrage (RVA). The HFRI Relative Value Index was up 10.5 per cent for 2012, the fourth consecutive calendar-year gain; the RVA Index has generated positive performance in 41 of 48 months since the nadir of the financial crisis in December 2008. Investors allocated USD6.5bn of new capital to RVA in 4Q, bringing full-year capital inflows to USD41.4bn; these inflows vaulted RVA to the largest strategy area of hedge fund capital with USD609bn, overtaking equity hedge as the top strategy area for the first time since 1991.

Event driven was the top-performing strategy in 4Q with a gain of 3.22 per cent, finishing the year up 8.6 per cent.  However, investors also withdrew capital from this strategy, resulting in a 4Q12 outflow of USD3.5bn and completing a year that saw total net redemptions of USD6.6bn from event driven funds. Total assets in event driven strategies ended 2012 with USD558bn. Equity hedge strategies turned in positive performance in the volatile 4Q12, with the HFRI Equity Hedge Index gaining 1.86 per cent. Despite this 4Q gain, investors withdrew USD1.2bn from equity hedge funds in 4Q12 and a total of USD10.4bn on the year. Total assets in equity hedge strategies finished 2012 at USD598bn.

Macro hedge funds posted a decline for 2012, with the HFRI Macro Index falling by 0.40 per cent, with losses in systematic/quantitative CTA strategies. The HFRI Macro: Systematic Diversified Index fell by 2.7 per cent in 2012 on weakness in currencies and commodities.  Despite the performance decline, investors continued to favour macro strategies in 2012, as Macro funds experienced net inflows of USD1.66bn in 4Q and USD10.3bn for the full year; assets managed by Macro hedge funds ended 2012 at USD488bn.
 
HFR has launched the HFRU family of indices, including the HFRU Hedge Fund Composite Index, which gained 4.9 per cent in 2012. The HFRU Indices are published on a daily basis and comprise the most comprehensive benchmarks of Ucits hedge fund performance available. HFRU Indices are representative of the complete universe of hedge funds compliant with Ucits guidelines, and include four strategy indices (equity hedge, event driven, macro and relative value arbitrage) and an aggregate HFRU Hedge Fund Composite Index.

“Performance and capital flow trends, including the rise of relative value arbitrage funds and the proliferation of hedge funds compliant with Ucits guidelines, reflect a significant and fundamental shift in the hedge fund landscape as the industry evolves to meet investor requirements in coming years,” says Kenneth J Heinz, president of HFR. “Investor preferences have moved away from opaque, black-box, illiquid and high equity market beta strategies and have moved to embrace high quality strategies offering transparency, liquidity, tactical flexibility, strategic innovation, accessible account minimums, institutional risk management and consistent performance gains. In these ways, the evolved hedge fund industry will continue to appeal globally to individual investors as a vehicle to access sophisticated, transparent, long-short strategies, as well as to institutional investors as a powerful complement to existing equity and fixed income exposures.”

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