Capital invested in the global hedge fund industry surged to a record in the fourth quarter, finishing a strong year of capital growth as hedge funds posted the best performance in three years.
Total capital increased in 4Q by USD120 billion on USD10.5 billion of net inflows to USD2.63 trillion, the sixth consecutive quarterly record, led by a surge in investor interest in Event Driven strategies, including Special Situations and Distressed/Restructuring funds, according to the latest HFR Global Hedge Fund Industry Report.
For the full year, total hedge fund capital increased by USD376 billion on USD63.7 billion of net inflows, as the HFRI Fund Weighted Composite Index posted a gain of +9.2 percent, the best calendar year performance since 2010.
Event Driven funds led capital inflows across all strategies for the first time since 2007, with investors allocating USD29.5 billion in 2013. Event Driven strategies grew by USD140 billion to more than USD698 billion for 2013, surpassing Relative Value Arbitrage as the second largest strategy area of hedge fund capital. Inflows into Event Driven strategies for the year were led by Special Situations (USD15.4 billion), Distressed/Restructuring (USD6.7 billion) and Activist (USD5.2 billion) sub-strategies. The HFRI Event Driven Index gained +12.5 percent for 2013, the best performance since 2009.
Capital invested in Equity Hedge strategies increased by USD48 billion in 4Q, driven by investor inflows of USD8.6 billion, with total capital invested in the strategy reaching a record USD734 billion, the industry’s largest strategy concentration of investor capital; total assets invested in Equity Hedge increased USD136 billion for 2013. Investor inflows of USD17.9 billion were led by Multi-Strategy (USD15.1 billion) and Fundamental Growth (USD8.4 billion), while Fundamental Value, the largest EH sub-strategy by capital, experienced an outflow of USD10 billion for the year. The HFRI Equity Hedge Index gained +14.4 percent for 2013, also the best performance since 2009.
Total assets invested in fixed income-based Relative Value Arbitrage (RVA) increased by USD18 billion to USD684 billion in 4Q on USD2 billion of investor inflows. For the FY 2013, RVA increased by USD75.8 billion on inflows of USD22.6 billion, led by inflows into Multi-Strategy (USD14.8 billion), FI: Corporate (USD3.7 billion) and FI: Asset Backed (USD3.6 billion). HFRI Relative Value Arbitrage Index gained +7.0 percent in 2013, the fifth consecutive annual gain.
Macro funds experienced an outflow of USD13.3 billion in 4Q led by outflows from Systematic Diversified/CTA strategies of USD4.9 billion. The HFRI Macro: Systematic Diversified/CTA Index declined -0.7 percent for 2013, the third consecutive annual decline. Fourth quarter outflows offset allocations from prior quarters, resulting in a FY 2013 net redemption of USD6.3 billion from Macro funds. For the FY 2013, Macro assets increased by USD23.7 billion to USD511 billion as larger firms posted relative performance-based asset increases despite the equal-weighted HFRI Macro Index narrowly declining by -0.2 percent, also the third consecutive annual decline.
The concentration of capital inflows to the industry’s largest firms moderated slightly in 4Q, as investors allocated to firms across the market capitalisation spectrum. Investors allocated USD5.0 billion to firms with greater than USD5 billion in AUM, while allocating USD5.3 billion to firms with between USD1 and USD5 billion. For the FY 2013, investors allocated USD40 billion to firms with greater than USD5 billion, USD16.6 billion to firms with between USD1 billion and USD5 billion in AUM, and USD7.2 billion to firms with less than USD1 billion in AUM. By management firm location, 71.6 percent of 2013 capital inflows were allocated to firms located in the Americas region, with European-located funds receiving 22.3 percent while Asian-located funds received 5.8 percent of 2013 inflows.
“The powerful increase in investor risk tolerance drove strong capital flows into hedge funds as both institutional and retail investors positioned for greater intra-market equity dispersion across equity portfolios, and an extension of the dynamic M&A and Activist environment that dominated 2013,” says Kenneth Heinz (pictured), President of HFR. “Hedge fund industry growth has continued to a record level of assets despite the challenges presented by a transitional regulatory environment, strong gains in traditional equities, and uncertain macroeconomic and political environments in 2013. With the US Federal Reserve beginning the process of tapering stimulus measures and economic pressures receding across the EU, the combined normalisation of interest rates, equity market valuations and investor risk tolerance is likely to contribute to a conducive environment for actively managed, long-short investing as investors hedge 2013 beta-driven gains in favour of differentiated, uncorrelated alpha in coming years.”
