Investors increased allocations to hedge funds in Q4 2014 as financial market volatility soared into year-end led by a steep decline in oil, Euro currency weakness and sharp drops in both the Russian Rouble and equity markets.
Investors allocated USD3.6 billion of new capital to hedge funds globally in the quarter, bringing the full year of inflows to USD76.4 billion, the highest calendar year of inflows since 2007, as reported today in latest edition of the HFR Global Hedge Fund Industry Report, released today by HFR®, the established global leader in the indexation, research and analysis of the global hedge fund industry. Inflows and performance gains in 4Q increased total hedge fund capital to a record of USD2.85 trillion, while the broad-based HFRI Fund Weighted Composite Index® gained +3.3 per cent for the full year.
Many of the powerful year end macro trends have accelerated into early 2015, punctuated by the dramatic fall in the Euro following the Swiss National Bank’s surprise abandonment of the Swiss Franc/Euro exchange rate cap in mid-January. Investors benefitted from conservative and opportunistic hedge fund positioning into year-end, with Macro and quantitative CTA hedge funds posting gains driven by strong trends in short oil and Euro exposures. The HFRI Macro (Total) Index gained +2.9 per cent in 4Q14, while the HFRI Macro: Systematic Diversified/CTA Index advanced +6.0 per cent. For the year, the HFRI Macro (Total) Index led all strategies with a gain of +6.2 per cent, while the HFRI Macro: Systematic Diversified/CTA Index led all sub-strategies with a gain of +11.1 percent. Despite recent performance gains, investors continued to redeem from Macro strategies, with outflows concentrated in Multi-Strategy, Discretionary and Commodity focused funds. Macro experienced net outflows of USD7.2 billion in 4Q, bringing FY 2014 outflows to USD28.0 billion.
Investors increased allocations to Fixed income-based Relative Value Arbitrage (RVA) and Event Driven (ED) strategies in Q4 14, attracted to these exposures by dynamic activity in the event equity space and the challenging, complex environment for long-only fixed income investing. Nominal yields on many sovereign bonds have been driven into negative territory in anticipation of large scale bond purchases by the ECB. Nearly the same amount of investor capital was allocated to RVA and ED in 4Q, with these receiving inflows of USD4.98 billion and USD4.93 billion, respectively. For FY 2014, RVA strategies experienced inflows of USD45.5 billion, bringing total capital to USD760 billion, while ED received USD32.1 billion in inflows, bringing total capital to USD754 billion. The HFRI Relative Value Arbitrage Index was up +4.2 per cent for 2014, while the HFRI Event Driven Index gained +1.4 per cent. RVA sub-strategy inflows were led by credit Multi-Strategy funds, with these receiving USD4.7 billion in 4Q and USD30.2 billion for FY 2014. Similarly, ED inflows were led by Activist hedge funds, with these receiving USD4.1 billion in 4Q and USD14.2 billion for 2014, bringing total Activist hedge fund capital to nearly USD120 billion.
Equity Hedge strategies experienced narrow inflows of USD940 million in 4Q14, bringing FY inflows to USD26.8 billion; the HFRI Equity Hedge Index advanced +2.1 per cent for 2014. EH performance gains for 2014 were led by the HFRI EH: Technology/Healthcare Index which advanced +9.8 per cent, a return partially offset by a -5.4 per cent drop in the HFRI EH: Energy/Basic Materials Index. Inflows across EH sub-strategies for 2014 were led by EH: Fundamental Value, which experienced inflows of USD11.5 billion, partially offset by outflows of USD1.3 billion in Short Bias strategies.
Capital rotation across the industry’s largest funds in 4Q resulted in only a narrow net inflow of USD80 million to firms managing greater than USD5 billion, while firms managing between USD1 to USD5 billion experienced inflows of USD3.3 billion, and flows to firms below USD1 billion totalled USD226 million in Q4. For FY 2014, firms with greater than USD5 billion experienced net inflows of USD38.7 billion, while firms managing USD1 to USD 5 billion received USD27.6 billion and firms managing less than USD1 billion received USD10.0 billion in inflows.
Forty per cent of all hedge funds experienced inflows for the quarter, while sixty per cent experienced outflows. Total capital allocated to funds which received inflows in Q4 narrowly offset capital redeemed from funds which experienced outflows as investors rotated exposures within the industry, with USD37.4 billion of inflows offsetting USD33.8 billion of outflows.
“Extreme dislocations across financial markets in recent weeks, encompassing the dramatic slide in oil, negative sovereign yields, and the abandonment of the Swiss Franc/Euro cap, have sharply elevated expectations for volatility, significantly increasing both the opportunities and risks for investors in early 2015,” says Kenneth J Heinz, President of HFR. “Many hedge funds had maintained conservative positioning throughout 2014, opportunistically anticipating the macroeconomic turmoil which accelerated into year end, with many continuing to position for a sustained equity market correction in response to this volatility. In light of this, many global investors have increased and rotated their hedge fund portfolio exposures to provide an optimal combination of exposure to and protection from this dynamic market environment which complement traditional exposures.”
