Performance Equals AUM for Hedge Funds? Not Necessarily
Posted by Colin Lambert. Last updated: January 23, 2023
The final HFR report into hedge fund capital flows for 2022 makes for some interesting reading with the strategy that held things together for hedge funds in 2022 – macro – actually seeing a decline in assets during the fourth quarter of the year.
HFR says total global hedge fund capital finished the year at $3.83 trillion, a quarterly increase of $44 billion, but macro, which was up 14.2% according to the HFRI 500 Macro Index, saw a decline in AUM. The outperformance, HFR says its macro index outperformed technology equities by over 4700 bps, failed to prevent “performance-based declines and net asset outflows” of $34 billion. This means the strategy ends the year with $677.6 billion AUM, an increase on the full year of $40 billion.
Systematic diversified CTA strategies led the outflow, dropping an estimated $6.4 billion in Q4 and ending the year with $327.3 billion in strategy capital.
In contrast, thre credit and interest rate sensitive relative value arbitrage (RVA) multi-strategies, the HFRI 500 Relative Value Index gained just 0.74% in 2022, attracted an increase of $6.3 billion in assets during the quarter, to hit $633.9 billion.
HFR says event-driven strategies, it main index lost 6.3% in 2022, also gained assets, which largely offset performance related declines; equally, equity hedge strategies, which dropped 12.7% over the year, also managed to grow asset values.
The firm says outflows for Q4 and 2022 were distributed across firms of all asset sizes, with the industry’s largest firms, those managing greater than $5 billion, experiencing an estimated net asset outflow of $10.2 billion for the quarter and $31.9 billion for 2022.
Firms managing between $1 billion and $5 billion saw an estimated net outflow of $8.3 billion for quarter and $18.5 billion for the year, while investors redeemed nearly $3.1 billion from firms managing less than $1 billion in Q4, bringing the full year total outflow to $5.0 billion.
“For 2022, diversifying strategies such as macro, CTA and relative value arbitrage delivered inversely-correlated performance gains, which is precisely the reason and rationale used by institutions for allocating to such strategies,” says Kenneth Heinz, president of HFR. “Driven by these gains and other areas of equity and fixed income risk-reducing strategies, the HFRI 500 Macro Index, as well as the composite of all strategies industry-wide, delivered the widest outperformance of technology equity market declines since the inception of HFR Indices.
“Uncertainty regarding all of these macroeconomic and geopolitical drivers has accelerated into the first half of 2023 with increased focus on the impact of higher interest rates, generational inflation and expectations for global economic weakening,” he continues. “Leading funds continue to position for a fluid trading environment and accelerated cycles of volatility, with increased potential for destabilizing dislocations across all asset types. Once again, strategies which have demonstrated their ability to navigate the current extreme market volatility are likely to attract capital from leading global financial institutions seeking to stabilise their portfolios from losses in long equity and fixed income exposures, and to drive industry capital growth through 1H23.”