Total capital invested globally in hedge funds increased to a record level for the fourth consecutive quarter in Q2 2013, according to the latest HFR Global Hedge Fund Industry Report.
The growth in assets in 2Q13 extended a streak of steady increases in hedge fund capital despite a surge in financial market volatility into quarter end.
Total hedge fund capital increased by a net total of USD40bn in 2Q13 to a record USD2.41trn. Hedge funds that took in new capital saw inflows of USD55.9bn during the quarter, while funds that experienced redemptions booked outflows totalling USD41.4bn, resulting in a net inflow of USD14.5bn, which is in line with the 1Q13 inflow of USD15.2 bn.
Sixty per cent of all hedge funds experienced net inflows for 2Q13 while forty per cent experienced outflows. The first half 2013 inflow of USD29.8bn surpassed 1H inflows in 2012 (USD20.4bn) and nearly matched the full year 2012 total of USD34.4bn. The total number of hedge funds increased to over 10,000 funds for the first time since 2006, at which time a record number of 10,096 funds existed.
As the quarter concluded with a sharp rise in bond yields and widening high yield credit spreads, investors exhibited a preference for credit and interest rate sensitive event driven and relative value arbitrage strategies, with these receiving over USD14bn of combined inflows in 2Q and nearly USD25bn in inflows for 1H13. With contributions from high performing activist strategies and a dynamic M&A and corporate actions environment, the HFRI Event Driven Index led other main strategy areas for both 2Q and 1H13, gaining 1.8 and 5.7 per cent, respectively. Recent inflows represent a reversal for event strategies, which experienced net outflows of USD6.6bn in 2012. HFRI Relative Value Arbitrage Index was the leading area of both performance and capital inflows in 2012, posting a gain of 10.6 per cent and inflows of over USD41bn, increasing relative value arbitrage to the largest strategy area of hedge fund capital. The HFRI RV: Yield Alternatives Index is the leading sub-strategy area of hedge fund performance for 2013, posting a YTD gain of 12.1 per cent through June.
Investors allocated USD3.6bn of new capital to macro strategies in 2Q13, despite the HFRI Macro Index posting a decline of 0.5 per cent for 1H13. Investors withdrew net USD1.3bn from equity hedge strategies in 2Q13, partially reversing a similar inflow from 1Q13 and resuming the EH outflow trend from 2012. HFRI Equity Hedge Index gained 5.3 per cent in 1H13, although sub-indices HFRI Sector: Technology/Healthcare and Fundamental Value gained 8.9 and 8.6 per cent, respectively.
Positive capital inflows occurred across all fund sizes, with firms below USD500m in AUM experiencing combined inflows of approximately USD2.4bn. The industry’s largest firms, those in excess of USD5bn in AUM, experienced net inflows of USD6.1bn, while firms between USD1bn and USD5bn experienced inflows of USD5.8bn. Investors withdrew USD4.6bn from funds of hedge funds in 2Q13, bringing FY13 FOF redemptions to USD9.6bn.
“Hedge fund performance and capital flow trends reflect the contrast between the strong equity gains of 1Q13 and the sharp increases in bonds yields to conclude 2Q13, as investors exhibited a preference for exposures to powerful M&A and special situations trends and long/short exposure to credit and fixed income strategies, while reducing directional equity market exposure,” says Kenneth J Heinz, president of HFR. “Hedge fund managers and investors continue to position for a post-QE environment dominated by fundamental, mean-reverting and trend-following factors, with these in contrast to the macro policy and stimulus-dominated environment of recent quarters. As this environment develops, and concurrent with relaxation of certain marketing restrictions on hedge funds, investor preferences for sophisticated, specialised long/short exposure to these shifting dynamics are likely to drive hedge fund industry growth in 2H13.”