Hedge Fund Capital to New High: HFR
Posted by Colin Lambert. Last updated: January 24, 2024
Hedge fund capital has hit a new record according to indexation and analytics firm HFR, at $4.11 trillion, thanks largely to good performance during Q4.
Total hedge fund assets rose by $112 billion, net of what HFR says was actually a $24.5 billion outflow as investors reduced exposure to macro strategies that collectively had a mixed year. HFR says that total Macro capital declined by an estimated $22.4 billion in Q4, inclusive of net asset outflows of $12.2 billion for the quarter, reducing total strategy capital to $670.5 billion.
Macro sub-strategy asset decreases were led by quantitative, trend-following systematic diversified CTA strategies, which decreased by an estimated $16.6 billion in Q4, while divergent 2023 Macro sub-strategy performance played a role. The overall HFRI Macro Index fell 0.6% for the year, but within this the fundamental HFRI Macro: Discretionary Thematic Index gained 4.8% for the year, but the HFRI Macro: Systematic Diversified Index fell -3.9%. Total Macro capital declined by an estimated $7.1 billion in 2023, inclusive of net asset outflows of $7.9 billion for the year, HFR says.
Capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies increased in Q4, with capital increasing by an estimated $22.9 billion, raising total RV capital to an estimated $1.10 trillion. Multi-Strategy funds led RVA asset increases in Q4, adding an estimated $13.6 billion of capital to end the quarter at $675 billion.
HFR says reflective of the general financial market volatility that characterised 2023, capital flows for 2023 were unfavourable to the industry’s smallest funds, with firms managing less than $1 billion experiencing estimated net outflows of $10.2 billion for the year. Mid-sized firms managing between $1 and $5 billion experienced a smaller outflow of $2.0 billion for 2023, while the industry’s largest firms managing greater than $5 billion received an estimated net inflow of $2.7 billion.
“Total hedge fund capital surged to a record well above the historic $4 trillion milestone to conclude 2023 as investor allocations shifted focus to accelerating geopolitical risks and building M&A opportunities, while remaining concerned about the same volatile inflation, interest rates and macroeconomic considerations which have dominated the past two years,” says Kenneth Heinz, president of HFR. “Managers navigated a volatile mix of market cycles and risk paradigms in 2023, including not only rising and falling inflation and interest rates, but surging and receding bank risks, powerful technology and AI trends, and accelerating M&A opportunities into year-end.
“Oscillating between fluid and shifting risk-on and risk-off micro-cycles throughout 2023, the year ended on a powerful risk-on cycle, with leadership from directional Equity Hedge and Event-Driven strategies, with investors reducing allocations to uncorrelated Macro strategies,” he continues. “Despite the strong conclusion to 2023 and cyclically receding inflation and macroeconomic risks, geopolitical risks remain extremely 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. Investors are likely to remain focused on strategies which have demonstrated their ability to navigate the shifting volatility, not only in 2023 but over the tumultuous past four years, with a keen sensitivity to geopolitical risks, M&A opportunities, and defensive capital preservation in 2024.”