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HEDGE FUND CAPITAL RISES TO THIRD CONSECUTIVE RECORD
Inflows to Event Driven, Macro as investors position for uncertainty;  Healthcare leads industry performance in 1Q as redemptions slow
CHICAGO, (April 20, 2017) – Total hedge fund industry capital increased to a third consecutive quarterly record in the first quarter (1Q17), as investors increased allocations to Event Driven and quantitative, trend-following Systematic Macro strategies. Industry assets ended 1Q17 at $3.07 trillion, a quarterly increase of $47.2 billion (+1.6 percent), according to the latest HFR Global Hedge Fund Industry Report, released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry. In the trailing 12 months, total hedge fund capital has increased by +7.3 percent.
The HFRI Fund Weighted Composite Index® (FWC) rose +2.4 percent in 1Q17 led by Equity Hedge strategies, while the HFRI Asset Weighted Composite Index gained +1.9 percent. The HFRI FWC ended March 2017 with an Index Value of 13,258, representing the fourth consecutive monthly record.
Investor outflows in 1Q17 slowed to the lowest level since 4Q15. Net asset inflows to Event Driven and Macro strategies were offset by outflows from Equity Hedge and Relative Value Arbitrage strategies. Total industry net outflows slowed to $5.4 billion in 1Q17, the lowest quarterly outflow since $1.5 billion was redeemed in 4Q15; this follows an outflow of $70.1 billion for FY 2016, the largest calendar year outflow since 2009.
Total capital invested in Event Driven (ED) strategies increased by $16.2 billion to end 1Q17 at $793.5 billion, as investors allocated nearly $3.5 billion to ED in the quarter. The 1Q17 inflow to ED strategies is the first quarterly inflow since 3Q15 and represents a trend reversal from 2016, in which investors withdrew $38.1 billion from ED hedge funds. ED inflows were concentrated in diversified Multi-Strategy and Distressed sub-strategies, with these receiving $5.2 and $1.6 billion in 1Q17, respectively. The HFRI Event-Driven (Total) Index gained +2.2 percent in 1Q17 while the HFRI Event Driven (Asset Weighted) Index was up +2.8 percent; ED leads all strategy areas in the trailing 12 months, climbing +13.8 percent. The HFRI ED: Distressed Index gained +19.0 percent in the last year, the leading area of ED sub-strategy performance.
Macro strategies also experienced inflows in 1Q17, with gains concentrated in quantitative, trend-following Systematic Macro CTA. Total capital invested in Macro strategies increased by $4.0 billion to end 1Q17 at $579.2 billion, as investors allocated $730 million of net capital to Macro funds. Systematic strategies led Macro sub-strategy net inflows with $4.9 billion of new capital, bringing sub-strategy assets to $294 billion; 1Q17 represents the fourth consecutive quarter of net inflows for CTAs, totaling over $15 billion of new capital in the last year. The inflows to CTAs were offset by outflows of $3.8 billion from Discretionary Macro strategies, the fifth consecutive quarter of outflows from Discretionary Thematic funds. Macro performance has lagged other strategies recently, with the HFRI Macro (Total) Index posting a decline of -0.2 percent for 1Q and -0.75 percent in the trailing 12 months; the HFRI Macro Index (Asset Weighted) gained +0.8 percent in 1Q and +2.1 percent in the last year.
Equity Hedge strategies, the largest area of hedge fund strategy capital, posted the biggest asset increase of the four main hedge fund strategies in 1Q17, as strong performance drove assets to $870.7 billion, an increase of $21.6 billion. The capital growth in EH strategies was partially offset by investor outflows of $4.3 billion in 1Q17, as investor outflows were concentrated in Fundamental Growth and Fundamental Value sub-strategies, which experienced outflows of $3.6 billion and $2.8 billion, respectively. Partially offsetting these redemptions, Quantitative Directional and Equity Market Neutral funds received $1.7 and $1.3 billion of new investor capital, respectively. The HFRI Equity Hedge (Total) Index led all strategies in 1Q17 with a gain of +3.8 percent and has jumped +11.5 percent in the trailing 12 months, trailing only the HFRI ED Index over the last year. The HFRI Equity Hedge (Asset Weighted ) Index added +3.2 percent in 1Q17 and has returned +9.1 percent in the last year. EH sub-strategy performance in 1Q was led by the HFRI EH: Healthcare Index, which was up +6.7 percent.
Total hedge fund capital invested in fixed income-based Relative Value Arbitrage strategies, the industry’s second largest area of strategy capital, increased by $5.4 billion in 1Q17 to $822.2 billion. The capital increase, driven by performance-based gains, was offset by investor outflows of $5.4 billion. RVA outflows were concentrated in Multi-Strategy funds, which experienced a net outflow of $3.6 billion in 1Q. The HFRI Relative Value (Total) Index gained +2.2 percent in 1Q17 and +10.4 percent in the last year, led by the HFRI RV: Yield Alternatives Index, which gained +23.4 percent in the trailing 12 months.
Quarterly net outflows by firm size were concentrated in the industry’s largest firms, as firms managing greater than $5 billion experienced outflows of $5.9 billion. Firms managing between $1–5 billion saw net outflows of $500 million, while firms managing less than $ 1billion received net inflows of $900 million.
“Hedge fund capital increased to an impressive third consecutive quarterly record, extending the recent growth trajectory and following the most challenging year of capital withdrawals since post-Financial crisis in 2009,” stated Kenneth J. Heinz, President of HFR. “Sophisticated investors continue to strategically position for market trends that drive hedge fund performance, including oscillating patterns of optimism and reversals of the Trump, Yellen, Brexit, and Euro trades, with each of these impacted by the increased possibility of geopolitical tensions and conflict. Funds that continue to demonstrate their ability to navigate these trends and generate strong performance will lead industry growth in 2017.”