Steady performance and investor inflows through Q3 2017 increased total hedge fund capital to a fifth consecutive record quarterly level, as global economic growth prospects improved despite continued elevated geopolitical risks.
Total hedge fund industry capital rose to a record USD3.15 trillion, an increase of USD50 billion over the prior quarter, as reported today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry. The HFRI Fund Weighted Composite Index gained 2.3 per cent in Q3 2017 and is up 5.9 per cent YTD, led by the HFRI Equity Hedge (Total) Index, which has climbed +9.8 per cent YTD.
Net investor inflows of USD1.7 billion slowed over the prior quarter but remained positive, as allocations offset both investor redemptions and the return of investor capital by certain managers. Though the YTD inflow total of USD2.5 billion remains muted, it represents a sharp reversal from the USD70 billion of investor outflows in 2016.
Continuing the trend from the prior quarter, Macro strategies led inflows for 3Q, despite posting only a narrow performance gain for the period. Currency and quantitative, trend-following CTA strategies led investor inflows, with investors allocating USD2 billion and USD1.8 billion of new capital to these, respectively. Macro funds collectively received net inflows of USD4.2 billion for Q3 2017, bringing YTD inflows to USD10.2 billion and total Macro capital to USD587 billion. The HFRI Macro (Total) Index posted a narrow gain of 0.4 per cent for the third quarter, though the Index has declined 0.4 per cent YTD for 2017.
Led by dynamic Activist strategies, Event Driven experienced inflows of USD3.5 billion for Q3 2017, offsetting similar outflows from the prior quarter, bringing YTD inflows to USD3.1 billion, and increasing total ED capital to USD815 billion. ED sub-strategy inflows were led by Activist strategies, which received USD2.3 billion of net inflows, while Distressed strategies received USD1.5 billion. The HFRI Event-Driven (Total) Index was up 2.1 per cent in Q3 2017, bringing YTD performance to +6.2 percent.
Equity Hedge strategies experienced a net capital outflow in Q3 2017 as investors reduced portfolio beta and exposure to record equity markets. An estimated USD2.9 billion was redeemed from EH strategies in 3Q, increasing the YTD net outflow to USD3.4 billion. Despite the quarterly outflow, total EH capital increased to a record USD919 billion on the surge of strong performance, maintaining EH as the industry’s largest area of capital. An outflow of USD6.6 billion from EH: Fundamental Value strategies were only partially offset by USD1.9 billion of inflows into EH: Quantitative Directional. The HFRI Equity Hedge (Total) Index gained 3.4 per cent in Q3 2017 and is up 9.8 per cent YTD for 2017, leading all main strategy performance. The HFRI EH: Healthcare Index leads all sub-strategy performance YTD with a gain of 16.9 per cent.
Fixed income-based Relative Value Arbitrage strategies also experienced a net outflow in Q3 2017, with investors redeeming USD3.1 billion, though total RVA capital increased to a record USD830 billion. Investors reduced exposure to credit multi-strategy funds in Q3, as these saw an estimated USD3.4 billion of outflows, representing the third consecutive quarter of outflows, and bringing YTD net redemption to USD9.7 billion. Only partially offsetting this, RVA: Sovereign strategies experienced an inflow of USD650 million in Q3 2017.
HFR also began tracking the performance of Risk Parity strategies in Q3 2017, with the HFR Risk Parity Vol 15 Index gaining 5.0 per cent in Q3 2017 and 12.4 per cent YTD. HFR estimates that approximately USD110 billion of hedge fund capital is managed in Risk Parity strategies.
Flows by firm size continued to slightly favour both the largest and smallest funds in the industry, with firms managing greater than USD5 billion receiving an estimated USD1.2 billion in Q3, while those managing less than USD1 billion collectively also experienced inflows of USD1.2 billion. Firms managing between USD1 and USD5 billion experienced a small outflow of USD700 million.
“The hedge fund industry continued the powerful process of performance, growth, expansion and evolution which has defined recent quarters, including investor-friendly trends toward lower fees and improved liquidity, as well as the proliferation of regulated vehicles and alternative beta strategies,” says Kenneth J Heinz (pictured), President of HFR. “Following eighteen months of strong equity market and hedge fund performance, many institutions and investors continue to explore the increased use of alternatives and alternative beta as mechanisms to insulate portfolios from potential market corrections and to increase the likelihood of achieving their required returns. We expect these trends to continue through year-end, driving industry growth into 2018.”
