Total hedge fund assets increased to USD3.245 trillion in the second quarter of the year, narrowly eclipsing the previous record level of USD3.244 trillion in Q3 2018, according to the latest HFR Global Hedge Fund Industry Report.
Led by a strong Q1 recovery from the defensive outperformance in Q4 2018, the HFRI Fund Weighted Composite Index gained +7.44 per cent in the first half of 2019, the strongest 1H gain since 2009. Like many US equity market indices, the 2019 performance increases the HFRI to a record index value of 14,391.
Total hedge fund assets increased by USD63.7 billion in Q2 on strong performance-based gains, following the USD78.8 billion increase in Q1 and bringing the YTD capital growth to USD142.5 billion through June. Investor redemptions in the quarter slowed to near-flat levels, as an estimated net USD4.8 billion was redeemed, following a total of USD45 billion in net asset outflows over the prior two quarters.
Event-Driven (ED) led strategy inflows in Q2, with the new allocations pushing M&A and corporate transaction-sensitive ED into the leading area for net asset inflows on the year. Investors allocated an estimated USD5.3 billion to ED in Q2, bringing 2019 net asset inflows to USD3.44 billion and increasing total ED capital to USD854.9 billion. ED sub-strategy inflows were led by equity-sensitive Special Situations, which received USD4.3 billion in net investors capital in Q2. The HFRI Event-Driven (Total) Index has gained +5.6 per cent in 1H19, led by a gain of +10.1 per cent in the HFRI ED: Activist Index.
Fixed income-based Relative Value Arbitrage (RVA) strategies generated net asset inflows of USD1.6 billion in Q2, bringing YTD 2019 inflows to USD2.9 billion. Total RVA capital increased to USD865.6 billion, the second largest area of strategy capital behind Equity Hedge. RVA sub-strategy inflows were led by the large credit multi-strategy funds in Q2, which received USD2.6 billion in inflows, bringing RVA: Multi-Strategy inflows to USD5.1 billion YTD 2019, leading all sub-strategies industry-wide. The HFRI Relative Value (Total) Index gained +5.4 per cent in H1 2019, after posting a narrow decline of -0.4 per cent in 2018. RVA sub-strategy performance was led by the HFRI: RVA: Yield Alternatives Index in 1H, surging +11.6 per cent.
Equity Hedge (EH) posted strong performance-based asset gains in Q2, though these were partially offset by small investor outflows. Total EH capital increased by USD14.1 billion, net of an investor outflow of USD5.5 billion, to finish Q2 at USD931.3 billion, the industry’s largest area of strategy capital. EH sub-strategy inflows were led by Quantitative Directional in Q2, which generated USD2.1 billion of net asset inflows, although these were offset by a net asset outflow of USD4.5 billion in Fundamental Value funds. The HFRI Equity Hedge (Total) Index leads all strategy indices for 2019 with a YTD return of +9.5 per cent, with EH sub-strategy performance led by a +12.8 per cent gain in the HFRI EH: Healthcare Index.
Similar to EH, Macro strategies also posted performance-based asset gains which were offset by small investor capital redemptions. Investors withdrew an estimated net USD6.2 billion from Macro strategies in Q2, though performance-based gains of USD17.9 billion increased total Macro strategy capital to USD593.3 billion. Multi-Strategy funds led Macro sub-strategy outflows with a net asset redemption of USD3.2 billion, which were only partially offset by a minor net asset inflow into Currency strategies. The HFRI Macro(Total) Index has gained +5.0 per cent for 2019, led by the HFRI Macro: Multi-Strategy Index which has advanced +6.4 per cent.
Investors resumed new allocations to the industry’s largest firms, with firms managing greater than USD5 billion generating net asset inflows of USD5.4 billion, while firms managing less than USD5 billion experienced new outflows of roughly USD10 billion. The Q2 net asset inflow to the largest firms represents the first quarterly net inflow of capital to these firms since 4Q17, following outflows of USD33.3 billion in 2018 and USD17.8 billion in Q1 2019.
“Hedge fund capital reached a new record through mid-year 2019 as the HFRI posted the best first half of performance in a decade, and as investors resumed allocations to the industry’s largest and most established firms,” says Kenneth J Heinz (pictured), President of HFR. “Constructive, yet fluid developments in ongoing trade negotiations, as well as expectations for lower US interest rates in the near term have also contributed to an evolving macroeconomic outlook which has resulted in record levels for US equites, but also represents a forward risk for valuations, especially with trillions of dollars of fixed income obligations trading with negative yields. Funds which are effectively positioned for the complexities of this environment, maintaining tactical long and short exposures across not only hedge fund strategies, but also across cryptocurrency and risk parity exposures, are likely to attract institutional investor capital throughout H2 2019.”