Hedge fund capital flows mixed in Q3

Total hedge fund capital was narrowly changed for Q3 2019, falling from the prior quarter record with flows mixed across strategies as investors navigated heightened fixed income risk and volatility, as well as fluid political developments across the U.S., Europe, the UK and Asia.

Total hedge fund capital declined modestly to USD3.24 trillion, a slight reduction from the prior quarter record of USD3.245 trillion, a decline of USD5.5 billion, or approximately 0.17 basis points, according to data released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry.
Capital inflows generated by new fund launches and into the industry’s most established firms were offset by outflows from fund liquidations and investor redemptions from small-to-mid-sized firms. Estimated total industry net asset outflows were USD6.8 billion for the quarter. The HFRI Asset Weighted Composite Index gained +0.3 per cent in Q3 2019, while the HFRI Fund Weighted Composite Index® posted a narrow decline of -0.4 per cent for the quarter.
Investors allocated new capital to fixed income and credit-based Relative Value Arbitrage (RVA) and Event-Driven (ED) hedge fund strategies, as investors positioned for ultra-low interest rates for near term, including the supply of nearly USD16 trillion of negatively yielding European government debt. M&A and credit-sensitive Event-Driven strategies experienced net asset inflows of USD5.7 billion, bringing the YTD inflows for ED to USD9.2 billion and total ED capital to USD852.2 billion. ED sub-strategy inflows were led by USD4.4 billion of inflows into ED: Multi-Strategy for the quarter. Relative Value Arbitrage strategies experienced modest estimated inflow of USD186 million, increasing the inflows YTD to USD3.1 billion and total RVA capital to USD868.3 billion, the industry’s second largest area of capital. The HFRI Event-Driven (Total) Index declined -0.6 per cent in 3Q, paring the YTD gain to +4.8 per cent, while the HFRI Relative Value (Total) Index produced a narrow +0.16 per cent gain in 3Q, increasing YTD performance to +5.6 per cent.
Total capital invested in Macro strategies increased by USD6.1 billion from the prior quarter to end 3Q at USD599.5 billion, as performance gains offset investor outflows. The HFRI Macro (Total) Index gained +1.5 per cent in 3Q, extending the YTD return to +6.5 per cent, while the HFRI Macro Index (Asset Weighted) advanced +1.9 per cent during the quarter. Investors withdrew an estimated net USD4.8 billion in 3Q, driven by a USD3.6 billion outflow in Macro: Multi-Strategy funds, while Active Trading strategies experienced a minimal inflow of USD66 million.
Equity Hedge (EH), the industry’s largest concentration of capital, experienced net asset outflows of USD7.9 billion in 3Q, paring total EH capital to USD919.6 billion. EH sub-strategy outflows were driven by Fundamental Value funds, which experienced net withdrawals of USD4.4 billion during the quarter, as these were only partially offset by an inflow of USD780 million into EH: Multi-Strategy funds. The HFRI Equity Hedge (Total) Index declined -1.1 per cent in 3Q, while the HFRI Equity Hedge Index (Asset Weighted) fell by -0.65 per cent.
“Total hedge fund industry capital was little changed in 3Q as a number of contributing factors had partially offsetting impacts and influences, including, but not limited to, beta reducing rebalancing and reallocation, liquidations and launches, and an increase in market volatility associated with ultra-low interest rates,” says Kenneth J Heinz (pictured), President of HFR. “The capital raising environment continues to be challenging, with geopolitical and macroeconomic factors motivating allocations for some investors while contributing to complacency and hesitation for others. It is likely that sophisticated investors will proceed with strategic allocations in coming quarters which improve overall portfolio-expected returns through efficient, opportunistic long-short exposures.”