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Hedge funds see largest quarterly asset decline since 2008 crisis

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Hedge funds saw the largest total capital decline since the Financial Crisis of 2008 in the third quarter, as global financial market volatility surged on uncertainty over US interest rates, China and M&A transactions. 

Estimated hedge fund capital declined by USD95 billion across all strategy areas to end the quarter at USD2.87 trillion, as new investor capital inflows only partially offset performance-based declines, according to the latest HFR Global Hedge Fund Industry Report. The quarterly asset decline is the first since Q2 2012 and the largest since Q4 2008.

The HFRI Fund Weighted Composite Index (HFRI) fell -3.9 per cent in 3Q15, extending a four-month drawdown of -5.1 per cent and bringing HFRI performance to -1.5 per cent YTD through September. Despite the negative YTD performance, the HFRI has outperformed the S&P 500 Index by approximately 370 basis points (bps) and the Dow Jones Industrial Average by over 700 bps, the widest margin since outperforming equities by 1800 bps in 2008.

New investor allocations of USD47.9 billion were only partially offset by redemptions of USD42.3 billion, resulting in a net inflow of USD5.6 billion in the quarter. Three of four main hedge fund strategy areas experienced net capital inflows for the quarter, led by Event Driven (ED) funds, which received inflows of USD5.4 billion. ED strategies suffered sharp performance losses in Q3, led by declines in widely-held positions in Glencore and Valeant, as the HFRI Event Driven Index fell by -5.1 per cent in the quarter, bringing YTD performance to -2.85 per cent. Despite the recently volatility, ED strategies have remained in favor with investors, with these receiving an estimated USD11 billion of net inflows YTD through September, bringing total ED capital to USD745 billion. Sub-strategy inflows were led by Activist and Distressed funds, with these receiving USD3.6 billion and USD2.2 billion in inflows, respectively, for the quarter.

Macro strategy hedge funds experienced outflows of USD5.1 billion in Q3, as volatility surged in Emerging Markets, equities, interest rates and commodities, bringing YTD net outflows to USD1.6 billion and decreasing total Macro capital to USD543 billion. The HFRI Macro Index fell by -0.6 per cent in Q3, despite gaining in two of the three months; the Index has declined -0.96 per cent YTD. Macro sub-strategy outflows were led by CTA strategies, which experienced outflows of USD3.6 billion in Q3.

Equity Hedge (EH) strategies lead capital inflows YTD despite net asset inflows falling in the most recent quarter, with EH receiving USD2.4 billion in 3Q and USD23.8 billion YTD. The HFRI Equity Hedge Index fell by -5.9 per cent in Q3 and has fallen -2.3 per cent YTD; EH is the largest strategy area of hedge fund capital, managing over USD808 billion. EH 3Q inflows were led by Multi-Strategy funds, which received USD2.1 billion in new capital; this was partially offset by USD1.3 billion of outflows from Fundamental Value strategies.

Fixed income-based Relative Value Arbitrage (RVA) strategies experienced inflows of USD2.9 billion in 3Q, bringing YTD inflows to USD12.2 billion and total RVA capital to an estimated USD777 billion. The HFRI Relative Value Index declined -2.7 per cent in the third quarter and has posted a narrow loss of -0.2 per cent YTD through September.

The industry’s largest hedge fund firms, which manage assets in excess of USD5 billion, experienced a small net outflow of USD300 million; these firms represent only six per cent of the total hedge fund industry but manage approximately 69 per cent of all industry capital. Hedge fund firms managing between USD1 billion and USD5 billion experienced inflows of USD3.6 billion, while firms managing less than USD1 billion received inflows of USD2.4 billion.

“Investors expanded allocations to small and mid-sized firms in Q3, reversing a trend of steadily increasing the capital concentration into the industry’s largest firms, as financial market volatility increased and hedge funds outperformed equity markets,” says Kenneth J Heinz (pictured), President of HFR. “Recent market turmoil has resulted in increased risk aversion by investors but has also created opportunities for innovative approaches in key tactical and strategic areas. Funds of all sizes have already experienced a powerful performance recovery through mid-October, which is likely to drive industry capital gains into year end.”

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