Hedge Fund Capital Pops Over $4 Trillion

Total hedge fund industry capital rose to surpass the $4 trillion milestone to begin 2022, HFR says, hitting an estimated $4.01 trillion, an increase of over $400 billion from the start of 2021.

In the latest release of the HFR Global Hedge Fund Industry Report, HFR says, total industry capital has soared by over $1 trillion in the trailing seven quarters since falling below $3 trillion in Q1 2020 as the global pandemic began.

Event-Driven (ED) strategies, which categorically focus on out of favour, often heavily-shorted, deep value equity and credit positions, extended asset increases through year end, with capital rising over $155 billion in FY 2021 to surpass $1.115 trillion, trailing only Equity Hedge as the largest strategy area of capital.

Total capital invested in Equity Hedge (EH) strategies experienced an increase of over $133 billion for 2021, bringing total EH capital to a record $1.227 trillion to begin 2022, as managers navigated intense volatility and rapidly evolving market cycles driven by coronavirus, accelerating inflation and rising interest rates.

As interest rates rose to conclude 2021 as they did throughout 2H21, capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies increased by over $86 billion for FY 2021, to begin 2022 at $1.027 trillion. As investors positioned for higher interest rates, RVA led main strategy net inflows for FY with $15 billion of new allocations; capital invested in RV: Multi-Strategy funds increased by an estimated $48 billion in 2021 to begin 2022 at nearly $600 billion AUM.

Total capital invested in Macro strategies rose over $33 billion in 2021 to end the year at $637.1 billion AUM, led by increases in Systematic Diversified/CTA and Commodity strategies, with these rising $20.7 and $5.2 billion, respectively for 2021. Like RVA, Macro also experienced net inflows for 2021, with investors allocating an estimated $3.1 billion of new capital during the year, led by $2.6 billion of inflows to Discretionary Thematic funds.

Following five consecutive quarters of the industry’s largest firms leading mid- to small firms in inflows, investors reversed this trend in the last quarter of 2021, with the largest firms experiencing an estimated net outflow of $7.4 billion during the quarter. Firms managing between $1 billion and $5 billion experienced a modest outflow of $113 million, while firms managing less than $1 billion experienced outflows of $1.3 billion over the quarter. For the full year 2021, firms managing greater than $5 billion received an estimated $5.7 billion, while mid-sized firms managing between $1 billion and $5 billion experienced net inflows of $3.94 billion, while firms managing less than $1 billion collectively saw estimated inflows of $5.5 billion over the year.

“Total global hedge fund capital surpassed the historic $4 trillion milestone to begin 2022 as inflation accelerated and interest rates increased, with performance and asset gains distributed across Equity, Event Driven (Special Situations and Shareholder Activist), Fixed Income Value, as well as certain Macro Discretionary Commodity, Thematic, and trend-following Quantitative CTA strategies,” says Kenneth Heinz, president of HFR. “The industry was able to surpass this historic milestone by navigating through volatility associated with the second year of the global coronavirus pandemic and variants, as well as rapidly increasing, generational inflationary pressures, and expectations for multiple interest rate increases in 2022.

“Year-end capital flows also indicated institutions are actively and tactically rebalancing portfolios across strategies, sub-strategies and firm sizes, focusing intently on portfolio duration, credit and interest rate sensitivity, strategic commodity and equity market exposures, as well as advanced metrics of defensive capital preservation,” he adds. “Funds which have demonstrated their strategy’s robustness through the multiple market cycles since the beginning of the historic pandemic and which are effectively positioned to navigate these multi-asset trends are likely to lead industry performance and growth into the new year.”