Hedge fund assets soar to all-time high, fuelled by record gains and booming investor confidence

Financial growth

Global hedge fund industry assets swelled to a new record high of USD3.8 trillion in the first three months of 2021, as managers recorded their strongest quarter since 2000 and investors duly poured more capital into a broad selection of strategy types, with the biggest hedge funds still taking the largest slice of client money. 

Hedge Fund Research estimates that net asset inflows from allocators reached about USD6.1 billion between the start of January and the end of March. That brought total net new inflows since Q3 2020 to USD22.1 billion. Overall, hedge funds added a total of USD201 billion during the three-month period, as HFR’s main Fund Weighted Composite Index spiked 6 per cent in Q1 – its strongest quarter since 2000.

Assets managed by event driven hedge funds have now topped more than USD1 trillion for the first time ever, only the second hedge fund strategy type to hit the USD1 trillion mark after equity-focused funds surpassed that milestone in Q4 last year. 

Total event driven capital grew by USD85.4 billion in Q1, bringing this sector’s assets to USD1.05 trillion. Event driven sub-strategy capital increases were led by special situations, which saw USD46 billion of performance-based capital gains in the quarter, bringing sub-strategy assets to USD483.3 billion. Overall, HFR’s Event Driven index surged 8.2 per cent in the three-month period. 

Meanwhile, equity hedge fund capital mushroomed to USD1.16 trillion between January and March this year, increasing by some USD62 billion, as investors added an estimated USD370 million of net new capital in the three-month period. Fundamental value strategies drew an estimated USD2.2 billion of new investor capital in the quarter to increase sub-strategy assets by nearly USD50 billion, inclusive of strong performance-based gains, HFR said. The HFRI Equity Hedge (Total) Index notched up a quarterly return of 7.1 per cent. 

Commenting on the numbers, HFR president Kenneth Heinz notes how the industry successfully overcame a volatile trading environment to record its strongest Q1 return in more than two decades, pushing inflows and capital increases to a new record volume of USD3.8 trillion. 

“The trading environment was dominated not only by the new US presidential administration, new stimulus measures, developments in vaccine administration and new virus variants, but also intense volatility in cryptocurrencies and associated with a surge in interest in out-of-favor, heavily-shorted, deep value equities from retail investors and trading platforms,” Heinz says of Q1’s gains. 

“Each of these, as well as evolving macroeconomic and geopolitical dynamics, represent both a risk and an opportunity for specialised hedge funds actively positioning in these areas.” 

Interest rate-sensitive, fixed income-based relative value arbitrage funds attracted the largest strategy inflow of capital during the quarter, as investors pledged an estimated USD5.6 billion of new money to RVA strategies. These inflows, along with strong performance-based gains (the sector gained 3.1 per cent in Q1), increased total relative value arbitrage capital to USD980 billion, an increase of USD39 billion for the quarter. 

Meanwhile, total macro hedge fund capital increased USD14.4 billion to USD618.3 billion - including an estimated USD875 million of net new investor capital – as performance gains were fuelled by a 4.1 per cent quarterly return. 

Elsewhere, size still matters to many investors, as the biggest hedge funds continued to take the largest slice of quarterly allocations. 

Firms managing greater than USD5 billion took an estimated USD5.3 billion of the USD6.1 billion total of net new investor capital in Q1. In contrast, mid-sized firms running between USD1 billion and USD5 billion suffered a small net outflow of USD1.4 billion for the quarter, while smaller managers with less than USD1 billion AUM collectively received estimated inflows of USD1.14 billion.