Investor interest in hedge funds grows as quarterly inflows surge between July and September

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Investor confidence in hedge funds appears to be on the rise, with allocators pouring in some USD13 billion between July and September, the first quarterly net inflow into the industry in two-and-a-half years.

New data published by Hedge Fund Research shows the industry on the whole drew positive net inflows for the first time since Q1 2018, with third quarter allocations – dominated by macro and relative value strategies – bringing the total amount of industry capital globally to some USD3.31 trillion.

HFR president Kenneth Heinz said the pick-up in inflows was driven both by defensive outperformance by hedge funds through the coronavirus-driven volatility in early 2020, as well as opportunistic gains through the uneven financial market recovery in the second and third quarters.

Uncorrelated macro-focused hedge fund strategies led the pack in the three months between July and September as investors, keenly aware of continued macroeconomic uncertainty and growing trends across global markets, pledged some USD7.2 billion across a range of strategy types.

That brought total macro assets to USD579.1 billion, with inflows split almost equally between CTA strategies and uncorrelated currency strategies, HFR said. Quantitative, trend-following systematic diversified CTA strategies drew USD3.2 billion of investor money, while currency-focused funds grew by USD3.1 billion.

Elsewhere, fixed income-based relative value arbitrage strategies received some USD5.5 billion of new investor capital in Q3, increasing total RVA capital to USD903.1 billion, while credit-based RVA multi-strategy funds attracted USD14.3 billion of new flows in Q3, bringing total RVA multi-strategy capital to USD531.9 billion.

Equity-based hedge fund strategies, traditionally a dominant component within the industry, attracted a comparatively small net inflow of capital in the three-month period. Altogether, investors pledged some USD397 million of net new capital in Q3, swelling the total equity hedge fund capital to USD972.7 billion.

HFRI metrics charted an investor rotation between certain sub-strands of equity-focused managers during the period: investors pulled USD2.46 billion from equity-based multi-strategy funds, but added USD2.5 billion to fundamental equity sub-strategies, including both growth and value.

Capital invested in event driven also grew in Q3 to the tune of USD40 billion, despite net outflows of USD198 million during the period, with performance-based gains driving the surge. Total event driven capital reached USD854.6 billion. Special situations-focused fund added USD1.5 billion of assets, but this was offset by outflows of USD1 billion from event-driven multi-strategy funds.

Overall, Q3’s inflows were dominated by industry’s largest firms, with firms running more than USD5 billion receiving an estimated USD11.2 billion in net asset inflows. In contrast, mid-sized hedge fund managers with between USD1 billion and USD5 billion registered a small outflow of USD810 million. Firms managing under than USD1 billion received inflows of USD2.6 billion.

“Institutions globally are making forward-looking allocations to hedge funds, anticipating and positioning for the near-term uncertainties of both the virus and the US election, as well as intermediate term macroeconomic uncertainties of the US, European and Asian economies into 2021,” Heinz said.

“Hedge fund strategies which have demonstrated powerful, opportunistic and uncorrelated performance throughout 2020 are likely to lead continued industry growth into 2021.”

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Hugh Leask
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Editor, Hedgeweek