Hedge fund capital ended Q2 2018 at a new record level for the eighth consecutive quarter as investors reversed Q1 strategy flow trends, allocating new capital to Equity Hedge strategies while redeeming from Macro strategies, with Relative Value Arbitrage and Event Driven also showing small outflows.
Total hedge fund industry capital globally increased by USD20.6 billion to a new record of USD3.235 trillion, according to the latest HFR Global Hedge Fund Industry Report.
Reversing the trend of inflows from Q1 2018, investors redeemed an estimated USD3.0 billion in Q2 2018, the first quarterly outflow since Q1 2017. Firms with large capital flows were nearly evenly distributed between inflows and outflows, with 12 firms experiencing inflows of greater than USD500 million, with these totalling USD15.5 billion. Conversely, 11 firms experienced outflows of greater than USD500 million, with these totalling USD14.3 billion. The total capital flow to all firms with net inflows in Q2 2018 was USD34 billion, while the total of all firms with net outflows was USD37 billion.
The HFRI Fund Weighted Composite Index (FWC) gained 0.84 per cent in Q2 2018, with strong performance in Technology and Event-Driven strategies partially offset by trade and tariff volatility in late Q2. The H1 2018 gain of 0.79 per cent for the HFRI FWC topped the performance of most equity markets globally, including the DJIA, as well as European and Asian equities, despite trailing the S&P 500. Indicating stronger relative performance from the largest hedge funds in the industry, the HFRI Asset Weighted Composite Index produced a higher gain of 1.4 per cent for H1 2018.
Reversing a trend of the prior three quarters, Equity Hedge (EH) strategies experienced an inflow for Q2 2018, as investors increased equity beta while reducing exposure to other strategies. EH funds received a net asset inflow of USD2.4 billion in the second quarter, increasing total EH capital to USD948 billion, the industry’s largest strategy capital area. By EH sub-strategy, Fundamental Value and Equity Market Neutral received a combined USD2.7 billion, which was partially offset by an outflow of USD1.7 billion in EH: Multi-Strategy. The HFRI Equity Hedge (Total) Index gained 0.85 in Q12 2018 and 1.2 per cent in H1 2018, while the HFRI Equity Hedge (Asset Weighted) Index gained 0.64 per cent in Q2 2018 and 1.75 per cent in H1 2018. EH sub- strategy performance was led by Healthcare and Technology in H1 2018, with the HFRI: EH: Healthcare Index gaining 10.3 per cent, leading all sub-strategy indices and topping the gain of the Nasdaq Composite Index, while the HFRI EH: Technology Index gained 7.9 per cent.
Macro hedge funds led outflows for Q2 2018 as investors rotated out of Macro multi-strategy funds. Macro strategies experienced net outflows of USD2.8 billion, reducing total Macro capital to USD594.2 billion. Nearly all of the Macro outflows were concentrated in Multi-Strategy (USD2.3 billion outflow), while Discretionary Thematic strategies only partially offset these with a net inflow of USD780 million. The HFRI Macro (Total) Index posted a narrow decline of 0.16 per cent in Q2, bringing the H1 2018 performance to a loss of -1.75 per cent. Also indicative of the trend of higher relative performance from larger hedge funds, the HFRI Macro (Asset Weighted) Index posted a gain of 0.84 per cent for H1 2018.
Total assets invested in both Event-Driven (ED) and Relative Value Arbitrage (RVA) strategies increased in H1 2018, as performance-based gains offset small outflows at the strategy level. Capital invested in ED rose by nearly USD10 billion in 2Q to USD845 billion as performance gains offset net redemptions of USD1.5 billion; this following USD4.4 billion of Q1 inflows, bringing the H1 2018 inflow to USD2.9 billion. The HFRI Event-Driven (Total) Index led all strategies in H1 2018 with a gain of 2.26 per cent; as with other areas, larger ED funds outperformed on a relative basis with the HFRI Event-Driven (Asset Weighted) Index gaining 2.9 per cent in H1 2018. Similarly, capital invested in RVA strategies increased by USD1.7 billion to USD848.2 billion despite a small 2Q outflow of USD1.1 billion. This outflow was also offset by a larger Q1 inflow of USD2.3 billion, bringing the total H1 2018 inflow into RVA strategies to USD1.2 billion. The HFRI Relative Value (Total) Index climbed 1.5 per cent for H1 2018, while the HFRI Relative Value (Asset Weighted) Index posted a higher return of +1.7 per cent.
Capital flows by firm size favoured mid-sized firms in Q2 2018, as firms managing between USD1 billion and USD5 billion received inflows of USD1.6 billion. Firms managing less than USD1 billion in AUM experienced outflows of USD880 million, while firms managing greater than USD5 billion experienced an outflow of USD3.8 billion, much of which was concentrated in a few firms. For H1 2018, the largest firms experienced outflows of USD4.1 billion, mid-sized firms saw inflows of USD264 million and firms managing less than USD1 billion saw inflows of USD1.9 billion, respectively.
“Performance and capital flow trends shifted and evolved in Q2 2018, as managers and investors adjusted to the impact of trade tariff financial market volatility and continued strong U.S. economic growth, driving capital flows into Equity Hedge and performance gains across M&A-centric Event Driven strategies, as well as specialised Technology exposures,” says Kenneth J Heinz (pictured), President of HFR. “The combination of trade tariff volatility and strong US corporate earnings has contributed to an expanded opportunity for specialised, long-short investing in these areas, with particular emphasis on technology, manufacturing, media and retail sectors, with these including relative value opportunities in M&A, Activist, Special Situations, Technology and Healthcare. Having reached an eighth consecutive record level of capital through mid-2018, it is likely that these will continue to drive industry growth and performance in the second half of the year and into 2019.”