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Hedge funds edge towards USD4 trillion milestone as volatility surges

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Total hedge fund industry assets have swelled to almost USD4 trillion globally, a rise of nearly USD370 billion since the start of this year, according to new capital flows data.

Total hedge fund industry assets have swelled to almost USD4 trillion globally, a rise of nearly USD370 billion since the start of this year, according to new capital flows data.

Hedge fund managers attracted USD5.6 billion of new investor money throughout the third quarter, supplemented by marginal performance-based gains, putting total industry capital at USD3.97 trillion overall, Hedge Fund Research stats show.

Global hedge fund assets have rebounded sharply over the course of the Covid-19 pandemic, according to HFR’s latest Global Hedge Fund Industry Report – with total industry capital soaring by more than USD1 trillion in the previous six quarters, after falling below USD3 trillion in Q1 2020 when the coronavirus outbreak began.

With the USD5.6 billion of inflows for Q3 this year, net inflows since Q3 2020 total some USD40 billion, HFR said.

“Total global hedge fund capital nudged higher Q3 2021 narrowly eclipsing the prior quarter record and inching towards the USD4 trillion milestone as commodity prices surged, interest rates increased, equity market volatility increased, and inflationary pressures continued to build,” said HFR president Kenneth Heinz.

Against a backdrop of declining Federal Reserve bond-buying and anticipated interest rate rises, Heinz highlighted strong performances and inflows among credit- and interest rate-sensitive fixed income relative value arbitrage hedge funds, which led the pack during the three-month period between July and September.

Overall, relative value arbitrage managers saw assets increase by USD16.8 billion, with contributions from both investor inflows and performance-based gains. Total capital invested in this sub-sector increased to USD1.026 trillion, including an estimated USD3.2 billion of net asset inflows for the quarter, led by multi-strategy funds, which increased by USD8.9 billion on performance-based gains and net asset inflows. 

Equity long/short strategies – a cornerstone of the global hedge fund industry – saw the bulk of investor inflows in Q3 as both managers and investors positioned for growing equity volatility and rising inflationary pressures.  

Equity long/short assets topped USD1.21 trillion at the end of Q3, with a modest performance-based decline partially offsetting net asset inflows. Total equity hedge capital globally has increased by USD119 billion since the start of 2021. Despite equity-focused managers slipping 0.8 per cent in Q3, year-to-date performance gains stand at 11 per cent.

Equity market neutral and energy/basic materials-focused funds saw Q3 capital increases of USD1.7 billion and USD1.5 billion, respectively.  

Global macro hedge funds – which had previously led investor flows in Q2 – suffered a narrow capital outflow in Q3, as USD1.6 billion of inflows to commodities-focused strategies were set against USD1.4 billion of outflows from quant CTA managers. Overall, HFR data shows total macro capital dropped by USD4.8 billion during Q3 to an estimated USD639 billion in assets.  

Meanwhile, event driven hedge funds remained steady during Q3, having early surpassed USD1 trillion the previous quarter. Total event driven capital dipped narrowly by USD1.6 billion in Q3, remaining at around USD1.09 trillion, the second largest strategy of total industry capital. Within the sector, distressed/restructuring strategies rose by USD2 billion in the three-month period to some USD250 billion. 

“Looking to the year ahead, managers and investors have increased their respective focus on portfolio credit and interest rate sensitivity, tactical commodity exposures and equity market exposures, with implied optionality and flexibility to adjust to a fluid macroeconomic environment and market conditions,” Heinz observed.

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