Hedge Fund Capital Hits New Highs: HFR

The hedge fund industry continues to attract assets and has, according to the latest HFR Global Hedge Fund Industry Report, surpassed “multiple milestones” in the first quarter of 2021.

The report says that total hedge fund capital was more than $3.8 trillion at quarter-end, an increase of $201 billion from the start of the year. Total capital has spiked by $844 billion in the trailing four quarters, HFR says, since falling below $3 trillion in the first quarter of 2020 as the global pandemic began. Estimated net asset inflows totalled $6.1 billion for the first quarter of 2021, bringing total net new inflows since Q3 of 2020 to $22.1 billion.

Strong performance is helping the industry attract assets, with the HFRI Fund Weighted Composite Index (FWC) gaining 6.0 percent in Q1, and the investable HFRI 500 Fund Weighted Composite Index advanced 5.0 percent. In addition, the HFRI 500 FWC Index surged +15.1 percent in the trailing five months, the best five-month performance since the its inception in 2014.

Interest rate sensitive, fixed income-based relative value arbitrage (RVA) strategies received the largest strategy inflow of capital in the first quarter, with investors allocating an estimated $5.6 billion of new capital to them. These inflows, along with strong performance-based gains, increased total RVA capital to $980 billion, an increase of $39 billion for the quarter. RVA Multi-Strategy funds led sub-strategy asset increases, with estimated capital inflows of $4.3 billion combining with strong performance-based asset gains bringing total sub-strategy assets to $573.1 billion. The investable HFRI 500 Relative Value Index gained 3.1 percent in 1Q, while the HFRI Relative Value (Total) Index advanced 3.1 percent for the quarter.

Uncorrelated Macro strategies also experienced asset increases in 1Q, with total Macro capital increasing by $14.4 billion to $618.3 billion, including an estimated $875 million of net new investor capital. Both quantitative and fundamental Macro sub-strategies experienced asset increases for the quarter, with trend-following Systematic Diversified/CTA strategies increasing by an estimated $5.1 billion, while Discretionary Thematic funds gained $4.1 billion.

Investor inflows were again led by the industry’s largest firms, with firms managing greater than $5 billion receiving an estimated $5.3 billion of the $6.1 billion total of net new investor capital in Q1. Mid-sized firms managing between $1 billion and $5 billion experienced a small net outflow of $1.4 billion for the quarter, while firms managing less than $1 billion collectively received estimated inflows of $1.14 billion.

“Hedge funds effectively navigated a volatile trading environment to the strongest 1Q gain in over 20 years, driving inflows and capital increases to a record global capital level of $3.8 trillion,” says Kenneth Heinz, president of HFR. “The trading environment was dominated not only by the new US presidential administration, new stimulus measures, developments in vaccine administration and new virus variants, but also intense volatility in cryptocurrencies and associated with a surge in interest in out of favour, heavily shorted, deep value equities from retail investors and trading platforms.

“Each of these, as well as evolving macroeconomic and geopolitical dynamics, represent both a risk and an opportunity for specialised hedge funds actively positioning in these areas,” he continues. “Leading institutional investors interested in defensive, opportunistic exposures to each of these are actively working to increase portfolio exposures to leading and innovative hedge funds which have and continue to navigate these rapidly shifting market dynamics.”