Hedge Fund Capital Still Growing: HFR

Hedge fund capital extended 2023 gains by continuing to grow in Q1 2024, according to the latest report from indexation and analysis firm HFR.

The report says total capital increased to what it calls a “milestone” $4.3 trillion thanks to strong performance and investor inflows. HFR says managers are navigating “a complex environment on improving economic outlook and acceleration of M&A concurrent with unprecedented geopolitical risks, including ongoing and potential military conflicts as well as inflation, interest rate and macroeconomic uncertainty”.

This is the sixth consecutive quarter that hedge fund assets have risen, in Q1 they grew by $190 billion as investors increased exposure to both directional Equity Hedge, Event-Driven and uncorrelated Macro strategies. Total Macro capital increased by an estimated $44.8 billion in Q1, inclusive of net asset inflows of $1.7 billion for the quarter, increasing total Macro strategy capital to $715 billion. Macro sub-strategy asset increases were led by quantitative, trend-following Systematic Diversified CTA strategies, which added an estimated $28.1 billion.

Hedge fund capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies also increased in Q1 as managers positioned for continued inflationary pressures and elevated interest rates. RVA capital increased by an estimated $25.8 billion, raising total capital to an estimated $1.13 trillion. Multi-Strategy funds led RVA asset increases in 1Q24, adding an estimated $17.2 billion of capital to end the quarter at $692 billion.

Capital inflows were heavily concentrated in the industry’s largest firms with firms managing greater than $5 billion experiencing an estimated net inflow of $14.4 billion, HFR says. Mid-sized firms managing between $1 and $5 billion experienced a smaller inflow of $1.67 billion, while firms managing less than $1 billion experienced an estimated inflow of $500 million.

“Total hedge fund capital accelerated the year-end surge in the first quarter to surpass the $4.3 trillion milestone, as managers focused on unprecedented risks and opportunities dominating allocations into mid-year 2024, with the most significant of these being geopolitical/military conflict, but also including ongoing volatile inflation, interest rates and macroeconomic considerations which have dominated the past two years,” says Kenneth Heinz, president of HFR. “At the same time, managers are also accessing exciting, volatile, and rich opportunity sets in AI, technology, cryptocurrency and M&A, positioning portfolios to access these.

“While Q1 was dominated by risk-on sentiment, early Q2 has experienced a sharp inflection point to intense risk-off sentiment, with growth areas such as semiconductors reaching correction territory on weakening demand and moderation of expectations for interest rate decreases in 2024,” he continues. “While many of the macroeconomic risks have remained and evolved over the past two years, geopolitical risk has accelerated to a historic, generational high, not only as pertaining to ongoing and potential military conflicts and foreign policy questions, but also relating to the political election cycle in the US, which has the potential to increase uncertainty and increased possibility for financial market dislocations associated with policy shifts.

“Managers which have demonstrated their ability to generate performance through both risk-on, risk-off and volatile transitions between these two paradigms are likely to attract increased interest from institutional investors seeking both opportunistic access to these opportunities while protecting portfolios from volatility and risk,” he concludes.