Hedge fund capital increased in the first quarter of the year, rising to a seventh consecutive record as investors reduced equity market beta in favour of M&A-focused Event-Driven (ED) exposures and fixed income-based Relative Value Arbitrage (RVA) strategies.
Total hedge fund industry capital globally increased USD4.5 billion to a new record of USD3.215 trillion, according to the latest HFR Global Hedge Fund Industry Report.
Following inflows of nearly USD10 billion for 2017, Q1 2018 net inflows totalled USD1.1 billion, with the gain moderated by a concentrated capital outflow within Equity Hedge strategies. This was the fourth consecutive quarter of positive fund flows, with the last outflow occurring in Q1 2017.
For Q1 2018, the HFRI Fund Weighted Composite Index posted a narrow gain of 0.14 per cent, with strong January performance partially offsetting the impact of trade and tariff volatility later in the period. The gain for the HFRI topped the performance of most equity markets globally, including the S&P 500, DJIA, as well as European and Asian equities. The HFRI Asset Weighted Composite Index produced a higher return of +1.4 per cent for Q1 2018.
Event-Driven led capital inflows for Q1 2018, as investors allocated toward M&A, Activist and credit-sensitive strategies while reducing equity market beta. Inflows into ED strategies totalled USD4.4 billion in Q1 2018, following a FY 2017 inflow of USD10.0 billion, bringing total ED hedge fund capital to USD835 billion. Special Situations led ED sub-strategy inflows, receiving USD1.6 billion in new capital and raising ED: SS capital to over USD380 billion. Activist and ED: Multi-Strategy funds received USD814 million and USD920 million in inflows, respectively. The HFRI Event-Driven (Total) Index returned +0.15 per cent in Q1 2018, while the HFRI Event-Driven Index (Asset Weighted) Index gained 0.73 per cent.
Fixed income-based Relative Value Arbitrage strategies also experienced inflows in Q1 2018, attracting USD2.3 billion of new capital and increasing total RVA assets to USD846.5 billion; the Q1 gains partially offset the 2017 capital outflows of USD5.6 billion. RVA sub-strategy inflows were led by Fixed Income: Asset-Backed, with these receiving USD1.5 billion. The HFRI RV: Asset-Backed Index gained 2.2 per cent in Q1 2018, in line with the +2.2 per cent return of the HFRI RV: Sovereign Index, as these two indices led RVA sub-strategy performance. The HFRI Relative Value (Total) Index climbed 0.3 per cent for Q1 2018, while the HFRI Relative Value (Asset Weighted) Index posted a higher return of +1.1 per cent.
Macro hedge funds posted a small net asset inflow for Q1 2018, as investor rotated out of discretionary commodity, fundamental and multi-strategy funds, and into quantitative, trend-following CTA strategies. Macro hedge funds experienced inflows of USD909 million, bringing total Macro capital to USD596.7 billion. Systematic Diversified CTA strategies received net inflows of USD4.45 billion, which follows the FY 2017 inflow of USD9.7 billion and brings total CTA capital to USD306 billion. CTA inflows were offset by outflows in fundamental Discretionary Thematic (USD1.8 billion), Commodity (USD1.3 billion) and Multi-Strategy (USD1.2 billion).
The HFRI Macro (Total) Index fell 1.25 per cent in Q1 led by declines in CTA strategies of 2.7 per cent, though intra-quarter performance was volatile, with the Index gaining 2.8 per cent in January before falling 3.5 per cent in February. The HFRI Macro: Systematic Diversified Index jumped +4.0 per cent in January before declining -6.2 per cent in February, the worst month in the history of the CTA Index. The HFRI Macro (Asset Weighted) Index posted a narrow decline of -0.1 per cent for Q1 2018.
Continuing the trend of 2017, Equity Hedge strategies experienced an outflow for Q1 2018, as investors reduced equity beta in favour of M&A and credit-sensitive strategies. Equity Hedge experienced an outflow of USD6.57 billion in the first quarter, which follows the 2017 outflow of USD5.4 billion. Despite the outflow, EH remains the industry’s largest strategy capital area with USD937 billion. Fundamental Value led EH sub-strategy outflows with a concentrated outflow of USD9.75 billion. This EH outflow was partially offset by Equity Market Neutral and Quantitative Directional funds, which experienced net inflows of USD2.0 billion and USD1.3 billion, respectively. The HFRI Equity Hedge (Total) Index led all main strategies in performance for Q1 2018, gaining +0.6 per cent, while the HFRI Equity Hedge (Asset Weighted) Index posted a higher return of +1.4 per cent. EH sub-strategy performance was led by the HFRI: EH: Technology Index in Q1 2018, which vaulted 4.8 per cent for the quarter.
Flows favoured smaller firms in Q1 2018, as firms managing less than USD1 billion in AUM received USD2.8 billion in inflows, while firms managing greater than USD5 billion experienced modest outflow of USD330 million and firms managing between USD1 to USD5 billion saw outflows of USD1.36 billion.
“The dominant trends in the hedge fund industry in Q1 2018 included broader equity market outperformance and defensive positioning as it pertains to overall equity market valuation, as well as specific to the trade and tariff volatility which accelerated through the end of the quarter,” says Kenneth J Heinz (pictured), President of HFR. “Two additional trends which continued from 2017 include investor reallocation from equity beta to M&A and credit market exposures, and reallocation from fundamental Macro strategies towards quantitative, trend-following Macro. It is likely that these will continue to drive industry growth and performance through mid-2018.”