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Kenneth J Heinz, HFR

Hedge fund capital at record level for third consecutive quarter

Total hedge fund industry capital increased to a third consecutive quarterly record in the first quarter of 2017, as investors increased allocations to event driven and quantitative, trend-following systematic macro strategies.

Industry assets ended Q1 2017 at USD3.07 trillion, a quarterly increase of USD47.2 billion (1.6 per cent), according to the latest HFR Global Hedge Fund Industry Report, released by HFR.
In the trailing 12 months, total hedge fund capital has increased by 7.3 per cent.
The HFRI Fund Weighted Composite Index (FWC) rose 2.4 per cent in Q1 2017 led by equity hedge strategies, while the HFRI Asset Weighted Composite Index gained 1.9 per cent. The HFRI FWC ended March 2017 with an index value of 13,258, representing the fourth consecutive monthly record.
Investor outflows in Q1 2017 slowed to the lowest level since Q4 2015. Net asset inflows to event driven and macro strategies were offset by outflows from equity hedge and relative value arbitrage strategies. Total industry net outflows slowed to USD5.4 billion in Q1 2017, the lowest quarterly outflow since USD1.5 billion was redeemed in Q4 2015; this follows an outflow of USD70.1 billion for FY 2016, the largest calendar year outflow since 2009.
Total capital invested in event driven (ED) strategies increased by USD16.2 billion to end Q1 2017 at USD793.5 billion, as investors allocated nearly USD3.5 billion to ED in the quarter. The Q1 2017 inflow to ED strategies is the first quarterly inflow since 3Q15 and represents a trend reversal from 2016, in which investors withdrew USD38.1 billion from ED hedge funds.
ED inflows were concentrated in diversified multi-strategy and distressed sub-strategies, with these receiving USD5.2 and USD1.6 billion in Q1 2017, respectively. The HFRI Event-Driven (Total) Index gained 2.2 per cent in Q1 2017 while the HFRI Event Driven (Asset Weighted) Index was up 2.8 per cent; ED leads all strategy areas in the trailing 12 months, climbing 13.8 per cent. The HFRI ED: Distressed Index gained 19.0 per cent in the last year, the leading area of ED sub-strategy performance.
Macro strategies also experienced inflows in Q1 2017, with gains concentrated in quantitative, trend-following systematic macro CTA. Total capital invested in macro strategies increased by USD4.0 billion to end Q1 2017 at USD579.2 billion, as investors allocated USD730 million of net capital to macro funds.
Systematic strategies led macro sub-strategy net inflows with USD4.9 billion of new capital, bringing sub-strategy assets to USD294 billion; Q1 2017 represents the fourth consecutive quarter of net inflows for CTAs, totalling over USD15 billion of new capital in the last year. The inflows to CTAs were offset by outflows of USD3.8 billion from discretionary macro strategies, the fifth consecutive quarter of outflows from discretionary thematic funds. Macro performance has lagged other strategies recently, with the HFRI Macro (Total) Index posting a decline of 0.2 per cent for 1Q and -0.75 per cent in the trailing 12 months; the HFRI Macro Index (Asset Weighted) gained 0.8 per cent in 1Q and 2.1 per cent in the last year.
Equity hedge strategies, the largest area of hedge fund strategy capital, posted the biggest asset increase of the four main hedge fund strategies in Q1 2017, as strong performance drove assets to USD870.7 billion, an increase of USD21.6 billion. The capital growth in EH strategies was partially offset by investor outflows of USD4.3 billion in Q1 2017, as investor outflows were concentrated in fundamental growth and fundamental value sub-strategies, which experienced outflows of USD3.6 billion and USD2.8 billion, respectively.
Partially offsetting these redemptions, quantitative directional and equity market neutral funds received USD1.7 and USD1.3 billion of new investor capital, respectively. The HFRI Equity Hedge (Total) Index led all strategies in Q1 2017 with a gain of 3.8 per cent and has jumped 11.5 per cent in the trailing 12 months, trailing only the HFRI ED Index over the last year. The HFRI Equity Hedge (Asset Weighted) Index added 3.2 per cent in Q1 2017 and has returned 9.1 per cent in the last year. EH sub-strategy performance in 1Q was led by the HFRI EH: Healthcare Index, which was up 6.7 per cent.
Total hedge fund capital invested in fixed income-based relative value arbitrage strategies, the industry’s second largest area of strategy capital, increased by USD5.4 billion in Q1 2017 to USD822.2 billion. The capital increase, driven by performance-based gains, was offset by investor outflows of USD5.4 billion. RVA outflows were concentrated in multi-strategy funds, which experienced a net outflow of USD3.6 billion in Q1. The HFRI Relative Value (Total) Index gained 2.2 per cent in Q1 2017 and 10.4 per cent in the last year, led by the HFRI RV: Yield Alternatives Index, which gained 23.4 per cent in the trailing 12 months.
Quarterly net outflows by firm size were concentrated in the industry’s largest firms, as firms managing greater than USD5 billion experienced outflows of USD5.9 billion. Firms managing between USD1 billion and USD5 billion saw net outflows of USD500 million, while firms managing less than USD1 billion received net inflows of USD900 million.
“Hedge fund capital increased to an impressive third consecutive quarterly record, extending the recent growth trajectory and following the most challenging year of capital withdrawals since post-Financial crisis in 2009,” says Kenneth J Heinz (pictured), president of HFR. “Sophisticated investors continue to strategically position for market trends that drive hedge fund performance, including oscillating patterns of optimism and reversals of the Trump, Yellen, Brexit, and Euro trades, with each of these impacted by the increased possibility of geopolitical tensions and conflict. Funds that continue to demonstrate their ability to navigate these trends and generate strong performance will lead industry growth in 2017.”

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