Total capital invested in the global hedge fund industry expanded during the first quarter at the fastest rate since 2010 as global financial institutions positioned for both growth and volatility across fixed income, equities, currencies and commodities.
Total assets under management increased by USD122bn, the largest increase since Q4 2010, bringing industry capital to a record USD2.375trn, according to the latest HFR Global Hedge Fund Industry Report.
Investors allocated USD15.2bn of net new capital to hedge funds in Q1 2013, marking the highest inflow since 1Q12. Hedge funds have experienced capital inflows in 14 of the 15 quarters.
Fixed income-based relative value arbitrage (RVA) strategies led capital inflows in Q1 2013 with a net asset inflow of USD9.4bn. RVA funds have led all strategies in capital inflows in each of the past three years, making it the largest area of assets by strategy, with nearly USD640bn in total capital. RVA growth has been driven by steady, consistent performance gains; the HFRI Relative Value Index gained 10.6 per cent in 2012 and 3.3 per cent in Q1 2013, while producing gains in 45 of 51 months since December 2008.
Investors allocated a net USD3bn to macro strategies in Q1 2013, inclusive of nearly USD5bn in net inflows to systematic CTA strategies. The HFRI Macro Index was the weakest area of industry performance in both 2012 and Q1 2013, declining by 0.3 per cent last year and gaining only 1.4 per cent in the first quarter.
Equity hedge (EH) was the strongest strategy area of industry performance in Q1 2013, with the HFRI Equity Hedge Index gaining 5.2 per cent; investors allocated USD1.86bn of net new capital to EH strategies in the first quarter. Event driven (ED) strategies experienced a net inflow of nearly USD1bn, with inflows in activist and credit arbitrage strategies slightly offset by outflows in other ED strategies.
Investor allocations were spread across an array of firm sizes, although the majority of net inflows were concentrated in the industry’s most established firms. Firms managing less than USD500m in capital experienced net inflows of approximately USD1.5bn, reversing the trend of the prior quarter. Despite investor redemptions from several large funds, firms with greater than USD5bn AUM recorded net inflows of over USD10bn in Q1 2013, increasing the total capital managed by these firms to more than USD1.6trn. Total capital invested in the hedge fund industry via fund of hedge funds increased to USD650bn, as performance-based asset gains were pared by net outflows of nearly USD5bn.
In-line with the performance of US equities, the HFRI Fund Weighted Composite Index gained 3.8 per cent in Q1 2013, ending the quarter with an index value of 11,474, which represents a new performance high watermark for the hedge fund industry. Individually, 45 per cent of all hedge funds reached their respective high watermarks in the first quarter. The total of net new capital from funds which experienced inflows in Q1 2013 was USD55.6bn, while the total from funds that suffered net outflows was USD40.4bn, resulting in the overall net asset inflow of USD15.2bn. Fifty-seven per cent of all hedge funds experienced net capital inflows in Q1 2013.
“While US equities reached record levels in Q1 2013, investors and asset managers were confronted with a complex environment dominated by the global asset pricing implications of aggressive quantitative easing and stimulus efforts, new European banking crisis developments, high profile shareholder activist campaigns and sharp reversals in currency markets, all preceding a dramatic commodity correction that began shortly after the close of the quarter,” says Kenneth J Heinz, president of HFR. “Many global financial institutions and sovereign wealth funds have evolved from their traditional allocations to a fully integrated portfolio model, utilising hedge funds as a mechanism to access these dynamic and interconnected markets and to mitigate the risk inherent in these exposures. As the strong risk-on environment has faded in early 2Q13, we expect a greater institutional emphasis on alternatives to continue and expand into mid-year 2013.”