Hedge fund assets near USD4 trillion as fresh inflation fears push investors towards alternatives

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Growing numbers of investors are turning to hedge funds to protect their portfolios in the face of inflationary fears, with total industry capital swelling to almost USD4 trillion and more allocators set to tilt towards alternative assets, new research shows.

Alternatives technology provider Vidrio Financial’s latest allocator market survey suggests inflation fears during the first half of 2021 are driving further allocations to alternative asset classes, such as hedge funds and private equity, which have historically outperformed equities and bonds during periods of inflation.

The Vidrio Financial Allocator Market Survey quizzed some 4,500 institutional investors globally in late June, collectively representing USD100 billion in assets under management and split roughly 60/40 between North America and EMEA,

The research found that one in 10 investors have “significantly adjusted” allocations to include more alternatives to protect their portfolios from inflation, while more than two-thirds – 70 per cent – have made “moderate adjustments.” Some 20 per cent had not yet made allocations adjustments, but plan to do so.

Asked about specific strategies, some 44 per cent of respondents said commodity funds would draw the largest allocations, with 33 per cent picking macro hedge funds. At the same time, some 22 per cent said CTAs and tail risk funds would each attract the biggest interest from allocators. 

“This shifting market environment has proven to be a boon for alternatives allocations,” said Gygmy Gonnot, managing director, head of Vidrio Research, noting that a a half year spike in inflationary forces is further driving an uptick in allocations.

“Many large institutional investors have made shifts to their portfolios on the margin to counteract potential near-term inflationary issues with alternatives benefiting, though many allocators were sanguine that even after a 40-year bull run in Treasuries any rise in inflation would not have a significant impact on overall portfolio returns.”

The study comes as net inflows into the hedge fund industry appear to be gathering pace, according to separate new research from BarclayHedge and Hedge Fund Research.

New BarclayHedge data indicates allocators pledged another USD36 billion in May, the third consecutive month of net inflows, and a 55 per cent month-on-month rise from the USD23.3 billion of allocator capital added in April.

Meanwhile, Hedge Fund Research said on Thursday that total hedge fund industry capital overall has soared to almost USD4 trillion at the end of the second quarter of 2021, up some USD360 billion from the start of the year.

Industry AUM – which now stands at USD3.96 trillion – has mushroomed by more than USD1 trillion over the past five quarters since dipping below USD3 trillion during the coronavirus-driven turmoil of Q1 2020. Uncorrelated macro strategies led net asset inflows in Q2, pulling in some USD8.3 billion of allocations as allocators positioned for continued equity, fixed income, currency, and commodity volatility.

“Recent growth has been driven across a broad continuum of strategies and macroeconomic portfolio scenarios, including balancing economic reopening/reflation trades with sharp reversals in these trends, including risks of additional virus variants, falling interest rates and possibilities for less robust economic growth over the intermediate term,” said HFR president Kenneth Heinz.

“Leading global institutions are continuing to make and expand allocations to hedge funds as an ideal portfolio mechanism to opportunistically participate in these powerful trends while maintaining tactical flexibility and adjusting to the fluid macroeconomic environment, including the increased influence of retail trading platforms on equity market prices and volatility.”