As a result of the volatility and positioning for generational inflation and increased likelihood of an economic recession, institutional investors withdrew an estimated $26.0 billion from hedge funds in Q3 2022, according to the latest HFR Global Hedge Fund Industry Report.
As a result of the volatility and positioning for generational inflation and increased likelihood of an economic recession, institutional investors withdrew an estimated $26.0 billion from hedge funds in Q3 2022, according to the latest HFR Global Hedge Fund Industry Report.
Total global hedge fund industry capital fell to $3.78 trillion in Q3, as managers navigated extreme volatility with leadership from uncorrelated Macro strategies, including Fundamental Commodity and Discretionary funds, as well as Quantitative, trend-following CTA strategies which posted record gains through Q3 as financial market volatility associated with generational inflation, sharply increasing interest rates, increased likelihood of a global recession, and geopolitical risks spiked to record levels. The HFRI 500 Macro Index surged +17.2 per cent YTD through Q3, topping the decline of US equities by nearly 5000 bps, the highest outperformance since index inception.
Negatively correlated Macro gains offset weakness in directional and higher beta strategies, bringing the YTD return of the HFRI 500 Fund Weighted Composite Index to -4.5 per cent through Q3, with both Macro and the overall Composite indices exhibiting the highest outperformance versus equity market declines in the first three quarters of a year since inception.
Larger, more established hedge funds outperformed smaller hedge funds in both September and YTD, with the HFRI Asset Weighted Composite Index (comprised of the same constituents as the equal-weighted version) advancing +0.5 per cent in September to increase its YTD return to +3.3 per cent.
The investable HFRI 500 Fund Weighted Composite Index declined -1.9 per cent in September, as gains in Macro, Currency, and CTA strategies were offset by declines in directional and higher beta strategies, lowering YTD performance to -4.5 per cent; the HFRI Fund Weighted Composite Index (FWC) has declined -6.67 per cent YTD 2022.
Strategy asset increases were again led by Macro strategies, which grew by $8.0 billion in Q322 on strong performance-based gains, ending the quarter at an estimated $711 billion. Macro sub-strategy asset growth was led by Fundamental, Discretionary strategies, which increased by $2.7 billion, while quantitative, trend-following CTA strategies increased by $2.2 billion. The investable HFRI 500 Macro Index surged +17.2 per cent YTD through Q3, with contributions from the HFRI 500 FOF: Risk Mitigation (S) Index, which gained +9.2 per cent. the HFRI 500 Macro: Systematic Diversified Index, which soared +22.5 per cent, and the HFRI 500 Macro: Commodity Index, which vaulted a record +43.9 per cent YTD, leading all strategies and sub-strategies.
With interest rates rising sharply in 2022 and expectations for continued increases, capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies increased by $6.1 billion in Q322, ending the quarter with $1.03 trillion. RVA managers again navigated not only sharp increases in interest rates but also a yield curve inversion, the highest inflation in 50 years, a sharp increase in geopolitical risk, and expectations for additional rate increases in 2022. RVA: Multi-Strategy funds led inflows ($3.5 billion) and performance-based asset increases for the quarter, driving the sub-strategy capital to $627.6 billion. The investable HFRI 500 Relative Value Index posted a narrow decline of -0.7 per cent YTD through September, with losses in directional strategies offset by gains in the HFRI 500 RV: Volatility Index, which surged +14.2 per cent, and the HFRI 500 RV: Multi-Strategy Index, which added +2.7 per cent over the first nine months of the year.
Event-Driven (ED) strategies, which categorically focus on out of favour, often heavily shorted, deep value equity and credit positions, experienced a nominal outflow of only $583 million in Q3, which combined with a performance-based decline resulted ED asset declining by $9.9 billion over the quarter, reducing total ED capital to $1.0 trillion. ED sub-strategy asset declines were almost entirely concentrated in higher beta ED: Special Situations, which fell $9.2 billion in the quarter on investor redemptions and performance-based losses. Capital increases of $4.1 billion in low volatility ED: Credit Arbitrage strategies partially offset overall ED losses. The investable HFRI 500 Event-Driven Index declined -8.8 per cent YTD through September 2022, while the HFRI Event-Driven (Total) Index fell -8.0 per cent.
Total capital invested in Equity Hedge (EH) strategies declined in Q3, as performance-based losses, combined with an estimated net asset outflow of $12.4 billion, decreased total EH capital to $1.04 trillion. EH sub-strategy outflows were led by Equity Market Neutral and Fundamental Growth, which experienced outflows of $3.5 and $3.2 billion, respectively. The investable HFRI 500 Equity Hedge Index has fallen -15.6 per cent YTD through September, with declines led by the HFRI 500 EH: Fundamental Growth Index, which lost -23.2 per cent, and the HFRI 500 EH: Healthcare Index, which fell -18.6 per cent; the HFRI Equity Hedge (Total) Index also declined -14.1 per cent over the first nine months of 2022. EH losses were partially offset by gains in the HFRI 500 EH: Energy/Basic Materials Index, which surged +13.1 per cent YTD 2022.
The industry’s largest firms, those managing greater than $5 billion, led investor outflows in Q3, with these experiencing an estimated net asset outflow of $18.9 billion for the quarter. Firms managing between $1 billion and $5 billion saw an estimated net outflow of $5.3 billion, while investors redeemed nearly $1.8 billion from firms managing less than $1 billion over the quarter.
