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Capital inflows drive hedge fund assets towards milestone in Q2

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Total global hedge fund industry capital rose to the 11th  consecutive quarterly record level in Q2 2015, according to the latest HFR Global Hedge Fund Industry Report. 

Investors allocated USD21.5 billion in net new capital to hedge funds in Q2 2015, the largest quarterly inflow since Q214, with allocations concentrated in Equity Hedge and Relative Value Arbitrage strategies, as well as in the industry’s largest hedge fund firms.  The second quarter inflow increased H1 2015 inflows to USD39.7 billion and total industry capital to USD2.97 trillion globally, as the hedge fund industry approaches the USD3 trillion milestone. The HFRI Fund Weighted Composite Index gained +2.53 per cent in H1 2015, the strongest half-year of outperformance over US equities since H1 2010.

Investors expanded their significant commitments to the industry’s largest and most established hedge fund firms, with inflows to firms managing greater than USD5 billion totalling USD15.7 billion in Q2 2015, the highest quarterly inflow to the largest firms since Q214. Top firms received nearly USD29 billion in new inflows in H1 2015, or approximately 71 per cent of net new capital allocations. The industry’s largest firms manage approximately 69 per cent of total hedge fund industry capital, though these firms represent only 6 per cent of the overall number of management firms. Hedge fund firms managing between USD1 to USD5 billion received inflows of USD1.8 billion in Q2 and USD5.3 billion in H1 2015, while all firms managing less than USD1 billion, which total 82 per cent of all hedge fund firms, received inflows of USD4 billion in Q2 and USD6 billion over the first half of the year.

Equity Hedge dominated strategy inflows in both Q2 and H1 2015, with these receiving USD11.8 and USD21.4 billion over each of these periods, respectively. This increased total Equity Hedge capital to USD847 billion at the end of Q2, making it the largest strategy area and approximately 28.5 per cent of all hedge fund capital. The HFRI Equity Hedge Index gained +4.1 per cent in H1 2015, also the strongest outperformance for this category versus US equities since H1 2010.

Fixed income-based Relative Value Arbitrage (RVA) also received strong inflows from investors in H1 2015, with investors allocating USD7.0 billion in Q2 and USD9.3 billion in H1 2015, bringing total capital in RVA strategies to USD788 billion, or approximately 26.5 per cent of total industry capital. The HFRI Relative Value Arbitrage Index gained +2.56 per cent in H1 2015. Similarly, investors allocated USD1.8 billion to Event Driven (ED) strategies in Q2 2015, bringing total ED inflows in H1 2015 to USD5.5 billion. Event Driven strategies manage USD784 billion globally, or approximately 26.4 per cent of total industry capital, while the HFRI Event Driven Index gained +2.6 per cent in H1 2015.

Despite the HFRI Macro Index leading all strategy index performance in 2014 with a gain of +5.6 per cent, Macro strategies received the smallest inflows from investors in both Q2 and H1 2015, with these receiving USD857 million and USD3.4 billion in each of these periods, respectively. Macro strategies manage USD550 billion globally, or approximately 18.5 per cent of industry capital, while the HFRI Macro Index trails all other strategies for H1 2015, posting a decline of -0.3 per cent for H1 2015, driven primarily by a sharp decline of -2.3 per cent in June to conclude H1 2015.

“Macroeconomic volatility increased to conclude the first half of 2015 with dislocations across China, Greece and oil, as well as on anticipated US Federal Reserve interest rate increases, all contributing to financial asset volatility and increased investor uncertainty entering the second half of the year,” says Kenneth J Heinz (pictured), President of HFR. “As a result of this, investors have increased allocations to sophisticated hedge fund strategies which reduce equity and fixed income market beta, as well as to the most well-established hedge fund managers. While the US economic expansion has continued, investor risk tolerance has decreased as a function of June volatility, driving capital allocations to the industry’s largest funds in anticipation of strong returns through volatile conditions in the second half of 2015.”

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