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Hedge fund assets hit fourth consecutive quarterly record

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Hedge fund capital rose to a fourth consecutive quarterly record as the combination of election and geopolitical risks, which have dominated financial market performance throughout 2024, accelerated into Q4, according to data from HFR.

The latest HFR Global Hedge Fund Industry Report reveals that total global hedge fund capital increased to an estimated $4.46tn, an increase of $148bn over the prior quarter on new investor inflows of $15.86bn, as investors positioned not only for the election and geopolitical risks, but for powerful trends in falling inflation/interest rates, technology, energy.

The growth in hedge fund capital was a combination of both new investor inflows and performance-based gains and was led by strategy asset inflows into relative value arbitrage, equity hedge, and event-driven strategies.

The HFRI Fund Weighted Composite Index advanced +2.8% in the volatile third quarter of the year, led by directional event driven and equity hedge strategies, bringing performance for the first three quarters to +8.1%. The volatile HFR Cryptocurrency Index returned +17.0% YTD through Q3 2024, navigating a sharp increase in volatility in the second and third quarters.

As investors continued to position for both interest rates reductions and increased geopolitical uncertainty, credit- and interest rate-sensitive fixed income-based relative value arbitrage (RVA) strategies saw assets increase by $37bn in Q3, led by net asset inflows of $6.7bn, to increase total RV capital to an estimated $1.196 trillion. Multi-Strategy funds again led RVA asset increases in Q3 2024, adding an estimated $23.9bn of capital to end the quarter at $736bn. The HFRI Relative Value Index (Asset Weighted) gained +3.1% in Q3 2024 bringing YTD gains to +7.2%, with sub-strategy performance again led by the HFRI RV: Convertible Arbitrage Index, which advanced +9.0% YTD through September.

Capital managed by equity hedge (EH) strategies also increased, recovering from the prior quarter decline, with capital increasing $54.6bn in Q3 on inflows of $6.2bn, bringing total EH capital to an estimated $1.294tn. EH sub-strategy asset increases were led by Fundamental Value funds in Q3, which increased by an estimated $35bn for the quarter, bringing total EH: Fundamental Value capital to an estimated $732.6bn. The HFRI Equity Hedge (Total) Index posted a strong gain of +3.8 in Q3 and leads all main strategies with a +10.2% return YTD 2024. The HFRI EH: Quantitative Directional Index leads all EH sub-strategy indices YTD, surging +16.8% through September.

Event-driven (ED) strategies, which categorically focus on out of favour, deep value equity, and credit positions, also experienced strong asset increase and inflows in Q3 2024 with assets rising $69.1bn on inflows of $3.56bn, increasing total ED capital to $1.27 trillion, second only to EH and narrowing the gap between the strategies areas as investors position for strong M&A cycle driven by lower rates and falling election risk in 2025. ED sub-strategy asset increases were concentrated in higher beta Shareholder Activist and Special Situations strategies, with these increasing by $11.8bn and $35.8bn, respectively, in Q3 2024. The HFRI Event-Driven (Asset Weighted) Index gained +4.6% in Q3 2024 bringing YTD performance to a gain of +9.2%; ED sub-strategy gains were led by the HFRI ED: Special Situations Index, which gained +9.3% YTD through September.

Uncorrelated macro strategies reversed recent gains, experiencing an asset decline for Q3 as inflation and interest rates declined, with assets declining by $12.7bn, bringing total Macro capital to an estimated $702.7bn. Systematic Diversified funds led Macro sub-strategy asset declines for Q3, with these falling an estimated $16.8bn bringing total sub-strategy capital to $322.8bn. The HFRI Macro (Total) Index posted a narrow decline of -0.7% in Q3, though the index has gained +4.62% YTD.

Investors allocated new capital across funds of all sizes in Q3 2024 led by inflows to the industry’s largest firms. Firms managing greater than $5bn received inflows of $10.4bn while mid-sized firms managing between $1bn and $5bn experienced estimated small net inflows of $7.5m for the quarter. Firms managing less than $1bn to start the quarter received strong inflows of $5.3bn. Combining these with 1H flows, the largest firms experienced inflows of $19.1bn, while mid-sized firms managing between $1bn and $5bn experienced an outflow of $4.9bn, and firms managing less than $1bn experienced an estimated inflow of $8.8bn.

“Hedge fund capital rose to a new record for the fourth consecutive quarter in the volatile third quarter, with managers navigating the largest dislocation and volatility spike in several years in early August, while the combination of election and geopolitical risks elevated to historic levels,” said Kenneth J Heinz, President of HFR. “At the same time, interest rate and inflation risks shifted from the generational peak levels to align with expectations for slowing global growth and moderating inflation, with managers and investors positioning for lower interest rates to drive M&A activity in 2025.

“With less than two weeks until the US presidential election, successful managers remain tactically positioned for a wide range of market reactions, scenarios and cycles, which can range from increased volatility, dislocation and disruption, increase or partial resolution of global military conflicts and new policies relating to trade, immigration, taxation, and general business outlook. Investors are likely to continue positioning for this uncertainty by allocating to funds which have demonstrated their strategies’ versatility and robustness through recent volatility spikes and dynamic financial market cycles.”

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