Hedge Fund Capital Continues to Surge
Posted by Colin Lambert. Last updated: July 23, 2021
Driven by the strongest first half performance in a calendar year since 1999, total hedge fund industry capital accelerated through the second quarter, surpassing multiple milestones of industry growth and expansion, according to research firm HFR.
Total hedge fund capital surpassed an estimated $3.96 trillion at quarter-end, an increase of $360 billion from the start of the year, HFR reports in the latest release of the HFR Global Hedge Fund Industry Report.
Total hedge fund industry capital has soared by over $1 trillion in the trailing five quarters, since falling below $3 trillion in at the start of 2020 as the global pandemic began. Estimated net asset inflows totalled $12.3 billion for Q2 2021, bringing total net inflows since Q3 2020 to $34.1 billion.
The HFRI Fund Weighted Composite Index (FWC) is up 10.1 percent in the first half of 2021, the strongest first half since 1999 and the fifth strongest H1 return since index inception. Furthermore, the HFRI FWC has surged 27.5 percent in the trailing 12 months, while the investable HFRI 500 Fund Weighted Composite Index jumped 9.2 percent in H1 2021, the best first half performance since index inception.
Uncorrelated macro strategies led net asset inflows, receiving an estimated $8.3 billion of net allocations as investors positioned for continued equity, fixed income, currency, and commodity volatility. Total macro capital increased by $25.5 billion to end the quarter at an estimated $643.8 billion AUM with both quantitative and fundamental macro sub-strategies experiencing asset increases for the quarter. This was led by trend-following systematic diversified/CTA strategies which increased by an estimated $11.6 billion, while discretionary thematic funds added $5.8 billion.
The investable HFRI 500 Macro Index and the HFRI Macro (Total) Index advanced 7.0 and 8.0 percent, respectively, in H1 2021, while the HFRI Macro: Commodity Index led macro sub-strategy performance in first half with a gain of 14.2 percent.
Total Equity Hedge capital had surpassed the $1 trillion milestone to conclude 2020 and extended its growth to reach $1.21 trillion in H1 2021, including an increase of $58.7 billion in the second quarter. Fundamental value funds led capital increases in Q2, with capital surging by an estimated $35.9 billion to end the quarter at $680.2 billion.
Growth has been driven across a broad continuum of strategies and macroeconomic portfolio scenarios
Having surpassed $1 trillion in the prior quarter, Event-Driven strategies, which categorically focus on out of favour, deep value equity and credit positions, extended asset increases to reach another record high. Total ED capital increased by $45.5 billion in Q2, bringing total capital to an estimated $1.092 trillion, the second largest strategy of total industry capital. ED sub-strategy capital increases were led by Special Situations, which generated an estimated $18.9 billion of performance- based capital gains in the quarter, bringing sub-strategy assets to over $500 billion.
Capital invested in interest rate-sensitive, fixed income-based Relative Value Arbitrage (RVA) strategies increased by $28.6 billion in Q2, including an estimated $5.5 billion of net asset inflows, to surpass $1 trillion for the first time. Led by asset increases of $18.4 billion in RV: Multi-Strategy funds, RV joined EH and ED strategies in surpassing the historic milestone.
Investor inflows were distributed across firms of all sizes, with firms managing greater than $5 billion receiving an estimated $5.5 billion of the $12.3 billion total of net new investor capital in Q2 2021. Mid-sized firms managing between $1 billion and $5 billion experienced a similar net inflow of $5.0 billion for the quarter, while firms managing less than $1 billion collectively received estimated inflows of $1.8 billion.
“The surge in global hedge fund capital accelerated through the second quarter of 2021 with a combination of inflows and record performance gains driving powerful growth, increasing total industry capital by over $1 trillion since the onset of the global coronavirus pandemic, and approaching the milestone of $4 trillion,” says Kenneth Heinz, president of HFR. “Recent growth has been driven across a broad continuum of strategies and macroeconomic portfolio scenarios, including balancing economic reopening/reflation trades with sharp reversals in these trends, including risks of additional virus variants, falling interest rates and possibilities for less robust economic growth over the intermediate term.
“Leading global institutions are continuing to make and expand allocations to hedge funds as an ideal portfolio mechanism to opportunistically participate in these powerful trends while maintaining tactical flexibility and adjusting to the fluid macroeconomic environment, including the increased influence of retail trading platforms on equity market prices and volatility,” he adds. “Funds which have demonstrated their ability to navigate this market paradigm are likely to lead industry growth in the second half of 2021.”