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Hedge fund asset volumes are setting new records, as uncorrelated gains draw more investor money

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Total global hedge fund assets under management have mushroomed to a record USD3.6 trillion, thanks to defensive outperformance and opportunistic gains during 2020’s upheaval – though the biggest firms continue to take the lion’s share of investor capital as smaller names are squeezed.

Investors added around USD16 billion to hedge fund strategies during the second half of last year, after net asset inflows reached USD3 billion in the fourth quarter, new data published by Hedge Fund Research shows.

In a webinar this week, HFR president Kenneth Heinz hailed 2020 as “one of the most impressive years in the history of the industry, if not the most impressive.”

He noted that last year’s performances – hedge fund strategies returned 12 per cent on average, according to HFR metrics – contrasted strongly with previous strong years for the industry, such as 1997 or 2009, due to the unique context and unprecedented challenges which managers were forced to navigate as a result of coronavirus.

The industry’s “defensive outperformance through the coronavirus-driven volatility in early 2020, as well as opportunistic gains through the uneven financial market recovery in the second and third quarters” has helped draw more institutional capital into the sector in recent months.

Investors were drawn mainly to the industry’s biggest names, HFR said, with firms managing greater than USD5 billion attracting some USD4.8 billion of net new capital during Q4. On the flip-side, mid-sized managers running between USD1 billion and USD5 billion suffered a small net outflow of USD436 billion in the same three-month period.

Smaller hedge fund firms saw an even bigger squeeze, as investors withdrew USD1.3 billion from those managers with assets under USD1 billion during Q4.

Sectorally, assets in equity-focused strategies topped USD1.1 trillion last year – the first of the four major hedge fund strategies to surpass the USD1 trillion milestone. Equity hedge fund capital grew USD121 billion, after investors poured in around USD1.7 billion of net new capital during the final three-month period of 2020.

Total capital invested in event driven hedge funds also ballooned in the last quarter. Investors pledged around USD2.94 billion of new capital to this sector, as strategy assets overall swelled by USD106.5 billion to end the year at USD961 billion.

The surge has meant event driven funds have now leapfrogged relative value arbitrage as the industry’s second largest area of strategy capital, HFR noted.

Allocators yanked around USD1.8 billion from fixed income relative value funds during Q4 last year, though overall strategy assets grew by more than USD38 billion thanks to strong fund performances. As a result, year-end capital in relative value funds hit USD941 billion.

As investors continued to position around macroeconomic uncertainty and powerful trends across global financial markets, macro hedge funds recorded small asset inflows of around USD185 million during Q4. The total amount of capital invested in macro hedge funds reached USD604 billion at the end of the year 2020, a rise of almost USD25 billion from the previous quarter.

Heinz said: “Institutions globally are making forward-looking allocations to hedge funds, anticipating and positioning for the near-term uncertainty of the virus containment, as well as intermediate-term macroeconomic uncertainties of the US, European and Asian economies into 2021. Hedge fund strategies which have demonstrated powerful, opportunistic and uncorrelated performance throughout 2020 are likely to lead continued industry growth into 2021.”

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