Hedge Fund Allocations at Seven-Year High
Posted by Colin Lambert. Last updated: April 25, 2022
Institutional investors allocated the largest amount of new capital to hedge funds since 2015 in the first quarter of 2022 according to hedge fund research firm HFR – the industry has added over $1 trillion in assets under management (AUM) since Q1 2020.
Total capital inflows in Q1 reached $19.8 billion according to HFR, with asset increases led by uncorrelated Macro strategies, which have performed strongly against the backdrop of geo-political and macro-economic upheaval. Macro strategies’ AUM grew by $40 billion in Q1 to end the quarter at $677.8 billion.
Macro sub-strategy inflows and asset increases were led by quantitative, trend-following CTA strategies, as investors allocated $3.3 billion of net new capital to CTAs, which produced performance-based gains of $27.8 billion to end Q1 with $336.9 billion AUM.
With interest rate volatility reaching what HFR terms “extreme” levels in Q1, capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies increased by $14.9 billion, ending the quarter with $1.035 trillion AUM. RVA managers navigated not only a sharp increase in interest rates, HFR says, but also a yield curve inversion, the highest inflation in 40 years, a sharp increase in sovereign default risk, an intra-quarter flight to quality reversal of interest rate increases, and expectations for additional rate increases in 2022. Multi-Strategy funds led RVA sub-strategies with performance-based gains of $11.9 billion, as well as in net asset inflows, receiving $6.4 billion of new investor capital.
Event-Driven (ED) strategies, which categorically focus on out of favour, often heavily-shorted, deep value equity and credit positions, led strategy capital inflows for Q1, though gains were offset by performance-based declines. Investors allocated $12.8 billion in new capital to ED strategies, as total ED capital held steady at $1.1 trillion, trailing only Equity Hedge as the largest strategy area of industry capital. ED sub-strategy inflows were led by Special Situations and Distressed sub-strategies, with these receiving $6.2 and $5.6 billion, respectively, of net new capital.
Equity Hedge (EH) strategies were something of an outlier in Q1 as minor inflows were offset by large performance-based declines. Total EH capital fell by $46.8 billion despite an investor inflow of $1.9 billion, driving total EH capital down to $1.18 trillion. EH sub-strategy net asset inflows were led by Fundamental Value and Multi-Strategy in 1Q22, with these receiving estimated net allocations of $1.9 and $1.6 billion, respectively, though these were partially offset by an outflow of $2.4 billion in Quantitative Directional strategies for the quarter.
Once again, the industry’s largest firms, those managing greater than $5 billion, led investor inflows, with these receiving an estimated $16.8 billion of net new capital. Firms managing between $1 billion and $5 billion had net inflows of $2.3 billion, while firms managing less than $1 billion received estimated net inflows of $723 million.
“Macro hedge funds experienced a historic quarter, not only leading capital increases and posting record, negatively-correlated performance gains, but doing so through intense, extreme volatility across multiple asset classes driven by surging geopolitical risks and macroeconomic uncertainty, with total global hedge fund capital remaining above the historic $4 trillion milestone,” says Kenneth Heinz, president of HFR. “Not only as a direct result of strong equity market outperformance but reflective of expectations of powerful trends in inflation, interest rates and corporate transactions, asset increases and investor inflows were opportunistically spread across a range of strategies and sub-strategies, combining the continuation of powerful uncorrelated recent trends with expectations for reversals of other higher beta exposures.
“Institutional investors are likely to continue increasing their commitment to funds combining effective, volatility-positive, capital preservation with managers offering opportunistic exposure to interest rate and inflation trends, with these effectively complementing existing portfolio holdings and duration,” he continues. “Funds tactically positioned to navigate these multi-asset trends are likely to lead industry performance and growth through mid 2022.”