Total hedge fund capital increased for the second consecutive quarter in the first three months of the year, as investors allocated new funds while key banking and financial risks surged and the risk of a recession increased, according to the latest data from HFR.
Total global hedge fund capital rose to $3.88 trillion, a quarterly increase of over $50 billion. Investors allocated an estimated $9.1 billion in new capital to the hedge fund industry in Q1 2023, the first quarter of net asset inflows since the first three months of 2022.
The investable HFRI 500 Fund Weighted Composite Index gained +0.52% in Q1 2023, led by directional Equity Hedge and Event Driven strategies, both of which navigated a complex and dynamic environment of soaring bank risk including the collapses of Silicon Valley Bank and Signature Bank, generalised weakness in regional banks, and the government-facilitated acquisition of Credit Suisse by UBS.
Directional Equity Hedge (EH) strategies led both capital inflows and total strategy asset increases in Q1 2023 performance, as tactical positioning through the March surge in risk, as well as underlying strength in Technology drove gains. Total Equity Hedge capital increased by an estimated $33 billion to end Q1 2023 at $1.11 trillion, driven by strong performance-based gains and an estimated net asset inflow of $3.3 billion. EH sub-strategy asset increases were driven by Fundamental Value funds, which added $21.9 billion in Q1 on strong performance and an estimated net asset inflow of $3.1 billion. The investable HFRI 500 Equity Hedge Index gained +2.9% in Q1, leading all strategy indices for the quarter.
Event-Driven (ED) strategies, which categorically focus on out of favour, often heavily shorted, deep value equity and credit positions, experienced an estimated asset increase of $18.4 billion in Q1, raising total ED capital to $1.054 trillion. ED effectively navigated not only the surge in bank risk but volatile swings in interest rates as well as an extreme dislocation and repricing of AT1 bonds associated with the government facilitated acquisition of Credit Suisse by UBS. ED sub-strategy asset increases were concentrated in higher beta ED: Special Situations, which added $4.8 billion in Q1, as well as Activist strategies, which increased by $7.5 billion. The investable HFRI 500 Event-Driven Index gained +1.1% in Q1, while the HFRI Event-Driven (Total) Index added +1.72% for the quarter.
Hedge fund capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies increased by $12.9 billion in Q1, raising total RV capital to $1.05 trillion. RVA managers navigated sharp increases in interest rates, a volatile flight to quality, and a significant reversal of expectations for the path of interest rate increases for 2023. RVA: Multi-Strategy funds led sub-strategy asset increases in Q1 2023, adding an estimated $8.6 billion of capital to end the quarter at $643 billion. The investable HFRI 400 (US) Relative Value Index gained +1.0% in Q1 2023, led by the HFRI 400 (US) RV: Multi-Strategy Index, which advanced +1.55% for the quarter, while the HFRI Relative Value (Total) Index added +1.2% in Q1.
After surging +14.35% in 2022, the HFRI 500 Macro Index fell -3.5% in Q1 2023, with negative contributions from Quantitative, Trend-Following CTA strategies, as well as weakness in short fixed income positions. Performance-based losses more than offset an estimated net asset inflow of $3.4 billion to Macro funds in Q1, as total Macro capital declined by $14.3 billion to end Q1 at $663.3 billion. Macro sub-strategy asset declines were driven by Systematic Diversified CTA strategies, which fell $7.1 billion on performance-based losses to end the quarter with an estimated $320.1 billion AUM; the investable HFRI 500 Trend Following Index fell -4.2% in Q1 2023.
Inflows for Q1 were distributed across firms of all asset sizes, with the industry’s largest firms, those managing greater than $5 billion, experiencing an estimated net asset inflow of $7.4 billion. Firms managing between $1 billion and $5 billion saw an estimated net inflow of $1.3 billion for quarter, while investors allocated an estimated $330 million to firms managing less than $1 billion in Q1.
