Hedge fund assets fall as market volatility surges on pandemic uncertainty

Total global hedge fund capital fell below USD3.0 trillion in Q120 for the first time since 3Q 2016, as financial market volatility surged on uncertainty and increased risks driven by the global coronavirus pandemic. 

Hedge fund capital declined by USD366 billion to end the quarter at USD2.96 trillion, a steep decline from the prior quarter record of USD3.32 trillion, as reported today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry, in the latest release of the HFR Global Hedge Fund Industry Report.

Investor outflows totalled an estimated USD33 billion in Q1, approximately 1.0 per cent of overall industry capital, the largest quarterly outflow since investors redeemed USD42 billion in 2Q09. The Q1 outflow is the 4th largest in industry history, with the three largest outflows occurring from 4Q08 through 2Q09. For perspective, the Q120 outflow as a percentage of industry capital was much lower than in 2008, as the 1 per cent redemption in Q1 was much lower than the nearly 9 per cent of industry capital redeemed in 4Q08, while roughly 16 per cent industry capital was redeemed in the one-year period of 3Q08 through 2Q09.

Performance-based asset losses totalled USD333 billion in Q120, as the HFRI Fund Weighted Composite Index fell -9.4 per cent during the quarter, inclusive of a -7.0 per cent decline in March. Performance losses were led by Event-Driven strategies, as the combination of falling equity markets and widening deal spreads drove the HFRI Event-Driven (Total) Index to a Q1 loss of -15.3 per cent, of which -12.75 per cent occurred in March. Defensively preserving capital through the volatility spike, the HFRI Macro (Total) Index posted a narrow gain of +0.07 per cent for Q1, including a return of +1.0 per cent in March. By way of comparison, the DJIA fell -23.2 per cent in Q1 while the Russell 2000 fell -30.9 per cent.

Despite leading industry performance, Macro strategies also led capital outflows in Q1, with investors redeeming USD22 billion from Macro, reducing strategy capital to USD561 billion. Macro sub-strategy redemptions were led by an estimated outflow of USD19 billion from quantitative trend-following CTA strategies, though these were partially offset by investor allocations of USD3.8 billion to fundamental Macro Discretionary strategies. Macro performance was led by the HFRI Macro: Currency Index in Q1, which gained +5.1 per cent.

Fixed income-based Relative Value Arbitrage (RVA) strategies also experienced a capital outflow in Q1, with investors redeeming an estimated USD4.6 billion from the category, reducing total strategy capital to USD821 billion. Multi-Strategy funds led RVA outflows with a net redemption of USD3.5 billion. The HFRI Relative Value (Total) Index declined -7.0 per cent in Q120, inclusive of a March decline of -6.5 per cent.

Equity Hedge (EH) and Event-Driven (ED) strategies also experienced outflows in Q1, with investors redeeming an estimated USD3.8 billion from EH, bringing total industry capital to USD835 billion, while redeeming USD2.4 billion from ED, reducing strategy capital to USD741 billion. EH sub-strategy outflows were led by USD2.8 billion in redemptions from Fundamental Growth, while ED outflows were led by USD2.8 billion redemption from Multi-strategy funds. Partially offsetting these, an estimated combined USD1.5 billion of inflows were allocated to ED: Distressed and Credit Arbitrage funds, while EH: Quantitative Directional saw inflows of USD3.2 billion.

Outflows by firm size were concentrated in the industry’s largest firms, with an estimated USD20.6 billion in capital was redeemed from firms managing greater than USD5 billion. Firms managing between USD1 and USD5 billion experienced outflows of USD11.0 billion, while investors redeemed USD1.6 billion firms managing less than USD1 billion.

“Investors reacted to the unprecedented surge in volatility and uncertainty driven by the global coronavirus pandemic with a historic collapse in investor risk tolerance and the largest capital redemption from the hedge fund industry since post-Financial Crisis,” says Kenneth J Heinz, President of HFR. “While volatility and market dynamics remain fluid through early 2Q, dislocations created by indiscriminate selling from traditional asset management have created significant opportunities for specialised long/short funds, which are likely to benefit both forward-looking funds and institutional investors in coming quarters.”