Hedge Fund Allocations on the Rise

Total hedge fund capital increased for the second consecutive quarter as investors allocated new capital while key banking and financial risks surged and the risk of recession increased, according to indexation and research firm HFR.

Hedge funds collectively gained through the volatile first quarter, as these risks complemented the ongoing macroeconomic risks associated with generational inflation, sharp increases in interest rates, and elevated geopolitical risk. Total global hedge fund capital rose to $3.88 trillion, a quarterly increase of over $50 billion, while investors allocated an estimated $9.1 billion in new capital to the hedge fund industry in Q1 2023, the first quarter of net asset inflows since Q1 2022.

Hedge fund capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies increased by $12.9 billion in Q1, raising total RV capital to $1.05 trillion. Meanwhile, performance-based losses more than offset an estimated net asset inflow of $3.4 billion to Macro funds in Q1, as total Macro capital declined by $14.3 billion to end at $663.3 billion. Macro sub-strategy asset declines were driven by Systematic Diversified CTA strategies, which fell $7.1 billion on performance-based losses to end the quarter with an estimated $320.1 billion AUM.

Inflows for the first quarter were distributed across firms of all asset sizes, with the industry’s largest firms, those managing greater than $5 billion, experiencing an estimated net asset inflow of $7.4 billion. Firms managing between $1 billion and $5 billion saw an estimated net inflow of $1.3 billion for quarter, while investors allocated an estimated $330 million to firms managing less than $1 billion in Q1.

“Investors allocated new capital to hedge funds in Q1 as bank and financial risk surged, the likelihood of an economic recession increased while the ongoing macroeconomic risks associated with generational inflation and geopolitical risks associated with the ongoing conflict in Ukraine and currency/global trade evolved and remained fluid,” says Kenneth Heinz, president of HFR. “Led by directional strategies, the industry navigated this complex cycle of disruption and dislocation to preserve capital and generate positive performance for the quarter.

“Industry performance was driven by a volatile combination of evolving risks from 2022 as well as new unpredictable risks surging in 1Q23, with managers navigating dislocations in bank stocks and AT1 bonds, while also managing a significant reversal of expectations for interest rates in 2023,” he continues. “Strategies which have demonstrated their ability to navigate the current extreme market volatility are likely to attract capital from leading global financial institutions seeking to opportunistically position their portfolios while also preserving capital, with these driving industry capital growth into mid-2023.”