Hedge funds concluded 2017 with the strongest capital inflows since Q2 2015, driving total assets to new record, while completing the first performance year without a monthly decline since 2003; according to the latest HFR Global Hedge Fund Industry Report.
Total hedge fund industry capital increased by USD59 billion to USD3.21 trillion, the sixth consecutive quarterly record for total industry capital.
Investors allocated USD6.9 billion of new capital to hedge funds in Q4 2017, the highest quarterly inflows since Q2 2015, bringing total 2017 inflows to USD9.8 billion. December marked the fourteenth consecutive monthly advance of the HFRI Fund Weighted Composite Index, which gained 8.7 per cent in 2017, the strongest calendar year return since 2013.
Driven by an active M&A environment, Event-Driven (ED) strategies led inflows for Q4, with investors allocating USD6.9 billion of new capital to the strategy, bringing total ED hedge fund AUM to USD831.6 billion. Multi-Strategy funds led ED sub-strategy inflows for both Q4 and FY 2017, receiving USD4.9 billion for the quarter and USD10.0 billion for the year. Partially offsetting the annual inflow, USD4.7 billion of net investor capital was redeemed from Special Situations funds in 2017. The HFRI Event-Driven (Total) Index produced a +7.7 per cent return for the year, led by an 11.9 per cent gain from the HFRI ED: Special Situations Index.
Fixed income-based Relative Value Arbitrage (RVA) strategies received USD1.3 billion of net inflows in Q4 2017, increasing total RVA capital to USD840 billion. RVA inflows were led by USD2.2 billion of new capital invested into RVA: Corporate funds, which was partially offset by outflows of USD1.7 billion from RVA: Multi-Strategy funds. The Q4 inflow helped to pare the FY17 outflow of USD5.6 billion from RVA strategies, of which USD5.4 billion occurred in 1Q17. The HFRI Relative Value (Total) Index gained +5.1 per cent for 2017, as US interest rates remained relatively stable throughout the year and a new Chairman of the US Federal Reserve Bank was appointed.
Macro funds received USD660 million of net inflows in Q4 2017, increasing the FY17 inflow to USD10.8 billion, which led all hedge fund strategies. Total Macro AUM ended the year at USD599 billion, an all-time high. Sub-strategy inflows for the year were led by quantitative, trend-following CTA funds, which received USD9.8 billion of new capital, and Currency strategies, which collected over USD5.1 billion. The HFRI Macro (Total) Index climbed 2.2 per cent in 2017, led by a 5.3 per cent gain from the HFRI Macro: Multi-Strategy Index.
Equity Hedge (EH), the industry’s largest strategy area, experienced outflows over the quarter, as investors pared equity beta exposure on strong gains in both direct equity markets and EH hedge funds. Investors redeemed USD2.0 billion from EH funds in Q4, bringing the FY17 outflow to USD5.4 billion, though total EH AUM increased to USD939 billion as a result of strong performance gains. For the year, EH sub-strategy inflows were led by Multi-Strategy and Quantitative Directional funds, each of which received USD7.1 billion of net investor capital, but these were offset by outflows of USD13.6 billion from Fundamental Value and USD9.2 billion from Fundamental Growth funds. The HFRI Equity Hedge (Total) Index topped all main strategies with a +13.5 per cent return in 2017, while the HFRI EH: Fundamental Growth led all sub-strategies with a gain of +19.5 per cent. The HFRI Emerging Markets (Total) Index surged 20.1 per cent in 2017, led by the HFRI India and HFRI China indices, which gained 36.9 and 32.2 per cent, respectively.
Flows by firm size for 2017 were led by managers with than USD1 billion, as these received USD7.4 billion of new capital, while the industry’s largest managers, those with greater than USD5 billion AUM, received USD6.3 billion of inflows. Investors withdrew a net USD3.9 billion from firms managing between USD1 billion to USD5 billion.
“2017 was a historic year in the hedge fund industry that included advancements in both the core and emerging areas of the industry, and that combined record capital levels and consistent performance gains with the evolution of risk parity, blockchain and cryptocurrencies,” says Kenneth J Heinz (pictured), President of HFR. “Having successfully navigated financial market challenges over the past year, 2018 presents an entirely new set of challenges and opportunities, including a new US Federal Reserve Chairman, infrastructure spending and tax cuts, the second year of the Trump administration, M&A and special situations driven by powerful trends in retail, technology, media and governance, as well as the transformative impact of blockchain technology. It is likely that the hedge fund industry will continue its powerful expansion into these core and emerging areas throughout 2018.”