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Fixed income-based Relative Value, Uncorrelated Macro see net inflows;

Directional HFRI Equity Hedge leads strategy performance through volatile 1H24

CHICAGO, (July 22, 2024) – Hedge fund capital extended the recent rise, narrowly surpassing the historic 1Q record and advancing further above the historic $4.3 trillion milestone in 2Q24 with managers navigating and positioning for an evolving, fluid, complex election cycle and geopolitical environment. Upcoming elections throughout Europe and upcoming US elections represent a significant risk of policy shifts, economic transition, trade adjustment and structural dislocations in coming months. These risks increased despite an improving economic outlook, acceleration of M&A concurrent with expectations for continued moderation in inflation and interest rate increases by the US Federal Reserve,

Total hedge fund assets increased for the seventh consecutive quarter in 2Q 2024, rising to an estimated $4.31 trillion, representing a quarterly increase of approximately $11 billion, as reported today by HFR^®, the established global leader in the indexation, analysis and research of the global hedge fund industry, in the latest release of the HFR Global Hedge Fund Industry Report. The growth in hedge fund capital was driven by 2Q performance-based gains and was lead by strategy asset inflows into Relative Value Arbitrage and Macro, which were offset by outflows in Equity Hedge and Event-Driven strategies.

The HFRI Fund Weighted Composite Index^® advanced +5.0 percent in 1H24, led by directional Equity Hedge and uncorrelated Macro strategies, while the HFRI Asset Weighted Composite Index^® advanced a similar +5.1 percent in 1H24, indicating a modest outperformance of larger funds over small to mid-sized funds for the period. The HFR Cryptocurrency Index returned +25.5 percent in 1H, with decline in 2Q moderating the gain of +45.3 percent in 1Q24.

As investors positioned for both interest rates reductions and increased geopolitical uncertainty, credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies led both strategy asset increases and capital flows, with RVA capital increasing by an estimated $30.3 billion in 2Q, increasing total RV capital to an estimated $1.16 trillion. Multi-Strategy funds again led RVA asset increases in 2Q24, adding an estimated $20.1 billion of capital to end the quarter at $712 billion, including $10.3 billion of new capital inflows. The HFRI Relative Value Index (Asset Weighted) gained +3.9 percent in 1H24 with sub-strategy performance again led by the HFRI RV: Convertible Arbitrage Index, which advanced +5.5 percent.

Uncorrelated Macro strategies extended 1Q inflows with additional capital inflows of $2.6 billion bringing the 1H inflows to $4.4 billion; total Macro capital remained steady at $715 billion. The HFRI Macro Index Asset Weighted Index gained +6.1 percent in 1H24 though the Index was little changed for 2Q, after posting the largest quarterly gain in the last 20+ years in 1Q24. Multi-strategy funds also led Macro sub-strategy asset inflows for 2Q, with these receiving an estimated $5.0 billion of new investor capital, while the Quantitative, trend-following HFRI Macro: Systematic Diversified Index led Macro sub-strategy performance in 1H24, advancing +7.9 percent.

Event-Driven (ED) strategies, which categorically focus on out of favor, deep value equity and credit positions, experienced a small decrease of capital of $7.9 billion in 2Q on mixed, volatile performance across certain ED sub-strategies. The decline reduced total ED capital to $1.20 trillion, a small reduction from the prior quarter record but still representing an estimated increase of $40 billion for 1H24. ED sub-strategy asset decreases were once again concentrated in higher beta Shareholder Activist and Special Situations strategies, with these decreasing by $6.7 billion and $2.6 billion, respectively, in 2Q24. The HFRI Event-Driven (Asset Weighted) Index gained +4.2 percent in 1H24 with sub-strategy gains led by the HFRI ED: Credit Arbitrage Index, which gained +5.9 percent.

Capital managed by Equity Hedge (EH) strategies declined in 2Q following the 1Q surge, with capital falling by $11 billion in 2Q after rising an estimated $69.2 billion in 1Q, bringing total EH capital to level of $1.24 trillion. EH sub-strategy asset decreases were led by Fundamental Value funds in 2Q, which fell by an estimated $9.2 billion for the quarter, bringing total EH: Fundamental Value capital to an estimated $697.6 billion. The HFRI Equity Hedge (Total) Index posted a strong gain of +6.1 percent in 1H24 after leading all strategy indices for 2023 with a gain of +11.4 percent. EH sub-strategy gains were led by the HFRI EH: Quantitative Directional Index, which surged +11.7 percent in 1H24.

Investors allocated new capital to smaller and new firms in 2Q, with these seeing inflows of $3.0 billion in 2Q while the industry’s largest firms (managing greater than $5 billion) and mid-sized firms managing between $1 and $5 billion experienced estimated net outflows of $5.7 and $6.7 billion, respectively for the quarter. Combining these with 1Q flows, the largest firms experienced inflows of $8.7 billion in 1H24, while mid-sized firms managing between $1 and $5 billion experienced an outflow of $5.0 billion, and firms managing less than $1 billion experienced an estimated inflow of $3.5 billion.

“Total hedge fund capital extended the recent gains with a more moderate gain in 2H, though still eclipsing the previous quarter record, increasing total global capital further above the $4.3 trillion milestone. Despite the continuation of the increasing trend, the composition of the growth and investor preferences by strategy shifted from the prior quarter with fixed income, credit, arbitrage, multi-strategy and macro funds leading recent asset increases. Even more so than the prior quarter, managers remained focused on unprecedented geopolitical and election risks and opportunities, with these not only including geopolitical/military conflict, but also including ongoing volatile inflation, interest rates and macroeconomic considerations which have dominated the past two years,” stated Kenneth J. Heinz, President of HFR. “The second quarter results reflect these increasing risks and a more balanced risk sentiment than 1Q, with managers navigating these thematic micro-cycles driven by shifting expectations for election results, policy changes, trade impacts, interest rate/inflation expectations and tension between extended equity valuations and the potential for continued growth. Investors and institutions are likely to increase commitments to managers positioned for these historic uncertain conditions and which have successfully navigated these cycles over the past year, with institutional investors seeking both access to these opportunities while protecting portfolios from volatility and risk.”