Investors continued to allocate new capital to the hedge fund industry in quarter two, exhibiting a clear and continued preference for strategies with characteristically low exposure to global equity markets, according to the latest HFR Global Hedge Fund Industry Report.
Investors allocated USD4.1bn in net new capital to hedge funds in 2Q12, bringing net inflows in 1H12 to over USD20bn. Despite the inflow, total hedge fund capital pulled back from the record level set in 1Q12 as a result of the -2.7 per cent performance of the HFRI Fund Weighted Composite Index in 2Q12, resulting in a total industry capital decline of 1.3 per cent from USD2.13trn to USD2.10trn.
Consistent with the trend from prior quarters, 2Q12 inflows remained concentrated in the industry’s largest firms, with over USD11bn allocated to firms with greater than USD5bn in AUM, while firms with less than USD5bn experienced a net redemption of approximately USD6.9bn. Inflows in 1H12 exceeded the USD8.5bn in inflows from 2H11 but were only approximately one-third of the USD62bn in net inflows from 1H11. Approximately 30 per cent of all funds experienced inflows in 2Q12 with these totalling USD43.3bn in total net inflows, while 70 per cent of all funds experienced net outflows, totalling USD39.2bn.
Investors also continued to exhibit a preference for fixed income-based relative value arbitrage (RVA) strategies in 2Q12, allocating nearly USD10bn to these funds, with a high concentration to RVA: multi-strategy funds. The HFRI Relative Value Index gained 4.2 per cent in 1H12, leading other hedge fund strategies, and RVA has posted positive monthly performance in 35 of 42 months since December 2008. Total hedge fund capital in Relative Value strategies increased to USD555bn as of the end of 2Q12, approaching the USD570bn invested in equity hedge, the industry’s largest strategy area. Equity hedge experienced a net redemption for 2Q12 of USD1.3bn; the HFRI Equity Hedge Index gained 2.2 per cent in 1H12.
Reversing the inflow from the prior quarter, investors withdrew USD3.5bn from macro strategies, with outflows concentrated in CTA and currency strategies. Ending the first half with a June decline of 1.4 per cent, the HFRI Macro Index posted a decline of 0.5 per cent for 1H12. Despite a gain of 2.5 per cent in 1H12, event driven strategies experienced a modest withdrawal of USD900m in 2Q.
“Hedge fund performance and capital flows in 1H12 reflect the fluid and volatile environment driven by the continuing European sovereign debt crisis and the recent softening of US economic data. Hedge fund gains in 1H12 also represent an important bifurcation of investor views regarding near term economic growth prospects, with equity market gains suggesting an improved outlook while historically low fixed income yields suggest an elevated risk of muted growth,” says Kenneth J. Heinz, president of HFR. “The hedge fund industry has evolved as an integral component of institutional allocations, allowing investors to pursue target return objectives in a transparent, risk-controlled environment, while acting as a liquidity provider and market risk participant. As financial institutions retrench from many lending and trading activities, hedge funds are likely to experience continued growth and expansion in 2H12 as a result of these trends.”