Global hedge fund capital increased in Q2 2016, recovering the decline from the prior quarter and rising above the year-end 2015 level to reach the third highest quarterly capital total on record, according to the latest HFR Global Hedge Fund Industry Report.
The industry navigated volatility and dislocations related to Brexit in late 2Q to post asset gains for both 2Q and 1H16. Total hedge fund capital rose to USD2.898 trillion as of 30 June, an increase of USD42.06 billion during the quarter, as the HFRI Fund Weighted Composite Index gained 2.0 per cent in Q2.
The current capital level was only surpassed in Q1 2015 and Q2 2015, at which time capital peaked at a record USD2.969 trillion, before falling into year-end 2015. Investor redemptions declined to USD8.2 billion in Q2 2016, decreasing by nearly half of the USD15.1 billion outflow in the prior quarter, though Q2 represents the third consecutive quarterly outflow for the hedge fund industry.
Event driven (ED) led all hedge fund strategies in capital increases in the quarter. Performance-based gains drove total ED capital to USD743.1 billion, a quarterly increase of USD13.1 billion, as the HFRI Event Driven Index gained 2.8 per cent in 2Q16. However, ED experienced net investor outflows of USD3.5 billion in the quarter, concentrated in special situations and distressed/restructuring sub-strategies, though these were partially offset by net inflows into merger arbitrage and ED: multi-strategy funds.
Fixed income-based relative value arbitrage (RVA) strategies posted similar performance-driven asset gains in 2Q, as the HFRI Relative Value Index added 2.9 per cent in the quarter, vaulting total RVA capital to USD784.4 billion, nearing the record level of RVA capital set in 2Q15. Investors redeemed a net USD1.6 billion from RVA hedge funds in 2Q, paring the 1H16 inflow for the strategy to USD3.7 billion. By sub-strategy, 2Q outflows were led by redemptions from FI: asset-backed and convertible arbitrage funds, while first half 2016 inflows were led by FI: sovereign and RV: multi-strategy hedge funds.
The HFRI Macro Index gained 1.68 per cent in 2Q, increasing total capital invested in macro strategies to USD557 billion, its highest asset level since 1Q15. Macro hedge funds experienced a net investor outflow of USD2.6 billion in 2Q, although this represents nearly a two-thirds decline from the USD7.3 billion redeemed in the prior quarter. By sub-strategy, capital in systematic diversified/CTA funds rose to USD270 billion, also its highest asset level since 1Q15, on quarterly inflows of USD1.4 billion; these were offset by outflows in discretionary strategies. Macro strategies led all hedge fund performance in 1H16 on strong Brexit market reaction, as the HFRI Macro Index gained 3.3 per cent, while the HFRI Macro: Systematic Diversified/CTA Index added 4.1 per cent.
Hedge fund capital invested in equity hedge (EH) funds, the industry’s largest strategy area by capital, rose to USD813.9 billion in 2Q, an increase of USD7.5 billion from the prior quarter, though total EH assets remain below the YE 2015 level of USD829 billion. EH strategies experienced a modest outflow of USD345 million in 2Q16, bringing total 1H16 outflows to USD5.0 billion. Investors allocated USD2.4 billion of net new capital to equity market neutral funds in 2Q, bringing 1H inflows to USD5.0 billion for this sub-strategy, though these were offset by outflows from Fundamental strategies over the quarter and entire first half of 2016. The HFRI Equity Hedge Index gained 1.4 per cent in 2Q, though the Index remains down -0.4 per cent YTD through June.
Capital flows in 2Q were propelled by several large fund liquidations, resulting in a net outflow to the industry’s largest firms (firms with greater than USD5 billion in AUM) of USD4.4 billion. Firms managing between USD1 and USD5 billion experienced a similar outflow of USD4.01 billion, while approximately USD360 million of net new capital was allocated to firms managing less than USD1 billion.
“Hedge fund industry growth accelerated in 2Q, posting the strongest quarterly asset growth since the first quarter of 2015, driven by strong quantitative CTA gains on Brexit Friday and broad-based industry wide gains across equity, commodity and currency markets pursuant to the Brexit dislocations,” says Kenneth J Heinz (pictured), president of HFR. “Institutional investors are actively seeking exposures which preserve capital, generate positive carry, provide opportunities during market dislocations, and assist them in achieving their respective required rates of return on capital. Hedge funds which have demonstrated these are likely to attract new investor capital and lead industry growth through a likely volatile 2H16.”
