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Hedge fund assets fall in volatile first quarter

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Hedge fund capital declined in Q1 2016, as volatile markets and early quarter performance resulted in falling investor risk tolerance and led to redemptions from underperforming strategies, according to the latest HFR Global Hedge Fund Industry Report. 

Total global hedge fund capital declined to USD2.86 trillion, including investor outflows of USD15.1 billion marking not only the largest quarterly outflow since 2Q09, but also the first consecutive quarters of outflows since 2009.

The HFRI Fund Weighted Composite Index posted a decline of -0.67 per cent in 1Q16, despite paring the January decline of -2.6 per cent with the March gain of +2.0 per cent. First quarter performance was led by quantitative Macro and trend-following CTA strategies, with the HFRI Macro Index gaining +1.4 per cent, while the HFRI Macro: Systematic Diversified Index advanced +2.7 per cent. Despite these performance-based gains, total hedge fund capital in Macro strategies declined to USD548 billion, inclusive of a net investor outflow of USD7.3 billion. Discretionary Thematic funds suffered the largest asset outflow of Macro sub-strategies, while Active Trading experienced a partially offsetting capital inflow.

Event Driven (ED) strategies also experienced a net outflow in 1Q16, led by Activist and Special Situations sub-strategies. Investors withdrew USD8.3 billion from all ED strategies, reducing total ED capital to USD729 billion. More than half of the ED outflow was from Activist strategies (USD4.3 billion), while Merger Arbitrage funds received a net inflow of over USD400 million.  The HFRI Event Driven Index was flat for 1Q16, recovering a steep January decline of -3.2 per cent with a sharp gain of +3.8 per cent in March. The HFRI ED: Activist Index declined -1.4 per cent for 1Q16, while the HFRI Merger Arbitrage Index gained +1.3 per cent.

Fixed income-based Relative Value Arbitrage (RVA) strategies experienced an inflow of investor capital in 1Q16, led by allocations to credit multi-strategy funds. Investors allocated USD5.3 billion in new assets to RVA, bringing total RVA capital globally to USD772 billion; sub-strategy inflows were led by RVA: Multi-Strategy funds, which received USD3.8 billion in new capital, the leading sub-strategy industry wide. The HFRI Relative Value Index declined -0.5 per cent in 1Q16, despite ending the quarter with a March gain of +1.7 per cent.

Investors withdrew USD4.7 billion from Equity Hedge (EH) funds in 1Q16, bringing total assets in EH to USD806.5 billion, the largest strategy area of industry capital. Sub-strategy outflows of USD5.7 billion from Fundamental Value were only partially offset by inflows of USD2.6 billion in Equity Market Neutral. The HFRI Equity Hedge Index declined -1.7 per cent in 1Q16, partially recovering the sharp January decline of -4.5 per cent with a March gain of +3.4 per cent.

Capital outflows were concentrated in the industry’s largest firms in the first quarter, as firms with more than USD5 billion AUM, which collectively manage 68.3 per cent of all industry capital, experienced net outflows of USD10.7 billion; this includes manager-initiated returns of investor capital and private family office conversions. Firms managing between USD1- 5 billion experienced net outflows of USD3.6 billion, while firms managing less than USD250 million recorded net inflows of USD730 million.

“The hedge fund industry began 2016 with a fractional decline as widely-anticipated asset outflows associated with manager-initiated return of investor capital and private family office conversions were only partially offset by new investor allocations in 1Q,” says Kenneth J Heinz (pictured), President of HFR. “The volatile performance environment continues to be dominated by intense dislocations, sharp reversals and rapidly shifting correlations across assets, with the recent realised volatility resulting in an improved opportunity set and wider arbitrage deal spreads. These are likely to contribute to performance gains as investor capital is re-allocated into funds and strategies positioned for this environment through mid-year.”

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