Hedge Funds AUM Rise Slightly in Q3

Total hedge fund industry capital increased narrowly in the third quarter according to research form HFR, as equity and interest rate volatility escalated, while managers and investors positioned for additional volatility through year-end.

Spurred by $5.6 billion of net investor inflows, as well as marginal performance-based gains, total hedge fund capital rose narrowly to an estimated $3.97 trillion to end 3Q 2021, representing an increase of nearly $370 billion from the start of the year, as reported in the HFR Global Hedge Fund Industry Report.

As reported previously, total hedge fund industry capital has soared by over $1 trillion in the trailing six quarters since falling below $3 trillion in Q1 20 as the global pandemic began. With the $5.6 billion of inflows for Q321, net inflows since Q320 have totalled an estimated $40 billion.

The HFRI Fund Weighted Composite Index was virtually unchanged for Q321, falling only 0.3 percent for the quarter, which follows the strongest first half of a calendar year since 1999 and the fifth strongest 1H return since index inception. The investable HFRI 500 Fund Weighted Composite Index has surged 9.11 percent year-to-date.

As interest rates rose to end Q3, credit and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies posted the largest increase in assets, with these growing by $16.8 billion with contributions from both investor inflows and performance-based gains. Total capital invested in RVA increased to $1.026 trillion, including an estimated $3.2 billion of net asset inflows for the quarter, led by RV: Multi-Strategy funds, which increased by $8.9 billion on performance-based gains and net asset inflows.

After leading inflows in Q2, uncorrelated Macro strategies posted a narrow outflow in the third quarter, as inflows to commodity-focused strategies were more than offset by outflows in Systematic Diversified CTA strategies. Total Macro capital fell by $4.8 billion to end 3Q at an estimated $639.0 billion in AUM, as a $1.6 billion increase in commodity-focused Macro was offset by investor redemptions of $1.4 billion in quantitative, CTA strategies.

Despite the small increase in global capital, investor inflows were distributed across firms of all sizes, with firms managing greater than $5 billion receiving an estimated $2.3 billion of the $5.6 billion total of net new investor capital in Q3. Mid-sized firms managing between $1 billion and $5 billion experienced a net inflow of nearly $500 million for the quarter, while firms managing less than $1 billion collectively saw estimated inflows of $2.8 billion.

“Total global hedge fund capital nudged higher in Q321 narrowly eclipsing the prior quarter record and inching towards the $4 trillion milestone as commodity prices surged, interest rates increased, equity market volatility increased, and inflationary pressures continued to build,” says Kenneth Heinz, president of HFR. “Interest rate-sensitive Relative Value Arbitrage strategies led both performance and inflows for the quarter, while managers and investors alike focused portfolios on interest rate exposures, as the US Federal Reserve signalled a decrease in bond purchases in coming months leading to an expectation of higher interest rates into 2022.

“Looking to the year ahead, managers and investors have increased their respective focus on portfolio credit and interest rate sensitivity, tactical commodity exposures and equity market exposures, with implied optionality and flexibility to adjust to a fluid macroeconomic environment and market conditions,” he adds. “Funds effectively positioned to navigate these multi-asset trends are likely to lead industry performance and growth into the new year.”