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Directional, Fixed income strategies see inflows through volatile 3Q24;

Event-Driven assets lead gains as investor position for strong M&A cycle

 

CHICAGO, (October 24, 2024) – Hedge fund capital rose to a fourth consecutive quarterly record as the combination of election and geopolitical risks, which have dominated financial market performance throughout 2024, accelerated into 4Q with the US election only weeks away. Total global hedge fund capital increased to an estimated $4.46 trillion, an increase of $148 billion over the prior quarter on new investor inflows of $15.86 billion, as investors positioned not only for the election and geopolitical risks, but for powerful trends in falling inflation/interest rates, technology, energy, cryptocurrencies and M&A 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 a combination of both new investor inflows and performance-based gains and was led by strategy asset inflows into Relative Value Arbitrage, Equity Hedge and Event-Driven strategies.

The HFRI Fund Weighted Composite Index^® advanced +2.8 percent in the volatile 3Q24, led by directional Event Driven and Equity Hedge strategies, bringing performance for the first three quarters to +8.1 percent. The volatile HFR Cryptocurrency Index returned +17.0 percent YTD through 3Q24, navigating a sharp increase in volatility in the second and third quarters.

As investors continued to position for both interest rates reductions and increased geopolitical uncertainty, credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies saw assets increase by $37 billion in 3Q, led by net asset inflows of $6.7 billion,  to increase total RV capital to an estimated $1.196 trillion. Multi-Strategy funds again led RVA asset increases in 3Q24, adding an estimated $23.9 billion of capital to end the quarter at $736 billion. The HFRI Relative Value Index (Asset Weighted) gained +3.1 percent in 3Q24 bringing YTD gains to +7.2 percent, with sub-strategy performance again led by the HFRI RV: Convertible Arbitrage Index, which advanced +9.0 percent YTD through September.

Capital managed by Equity Hedge (EH) strategies also increased, recovering from the prior quarter decline, with capital increasing $54.6 billion in 3Q on inflows of $6.2 billion, bringing total EH capital to an estimated $1.294 trillion. EH sub-strategy asset increases were led by Fundamental Value funds in 3Q, which increased by an estimated $35.0 billion for the quarter, bringing total EH: Fundamental Value capital to an estimated $732.6 billion. The HFRI Equity Hedge (Total) Index posted a strong gain of +3.8 in 3Q and leads all main strategies with a +10.2 percent return YTD 2024. The HFRI EH: Quantitative Directional Index leads all EH sub-strategy indices YTD, surging +16.8 percent through September.

Event-Driven (ED) strategies, which categorically focus on out of favor, deep value equity and credit positions, also experienced strong asset increased and inflows in 3Q24 with assets rising $69.1 billion on inflows of $3.56 billion, increasing total ED capital to $1.27 trillion, second only to EH and narrowing the gap between the strategies areas as investors position for strong M&A cycle driven by lower rates and falling election risk in 2025. ED sub-strategy asset increases were concentrated in higher beta Shareholder Activist and Special Situations strategies, with these increasing by $11.8 billion and $35.8 billion, respectively, in 3Q24. The HFRI Event-Driven (Asset Weighted) Index gained +4.6 percent in 3Q24 bringing YTD performance to a gain of +9.2 percent; ED sub-strategy gains were led by the HFRI ED: Special Situations Index, which gained +9.3 percent YTD through September.

Uncorrelated Macro strategies reversed recent gains, experiencing an asset decline for 3Q as inflation and interest rates declined, with assets declining by $12.7 billion, bringing total Macro capital to an estimated $702.7 billion. Systematic Diversified funds led Macro sub-strategy asset declines for 3Q, with these falling an estimated $16.8 billion bringing total sub-strategy capital to $322.8 billion. The HFRI Macro (Total) Index posted a narrow decline of -0.7 percent in 3Q, though the index has gained +4.62 percent YTD.

Investors allocated new capital across funds of all sizes in 3Q24 led by inflows to the industry’s largest firms. Firms managing greater than $5 billion received inflows of $10.4 billion while mid-sized firms managing between $1 and $5 billion experienced estimated small net inflows of $7.5 million for the quarter. Firms managing less than $1 billion to start the quarter received strong inflows of $5.3 billion. Combining these with 1H flows, the largest firms experienced inflows of $19.1 billion, while mid-sized firms managing between $1 and $5 billion experienced an outflow of $4.9 billion, and firms managing less than $1 billion experienced an estimated inflow of $8.8 billion.

“Hedge fund capital rose to a new record for the fourth consecutive quarter in the volatile third quarter, with managers navigating the largest dislocation and volatility spike in several years in early August, while the combination of election and geopolitical risks elevated to historic levels. At the same time, interest rate and inflation risks shifted from the generational peak levels to align with expectations for slowing global growth and moderating inflation, with managers and investors positioning for lower interest rates to drive M&A activity in 2025,” stated Kenneth J. Heinz, President of HFR. “With less than two weeks until the US presidential election, successful managers remain tactically positioned for a wide range of market reactions, scenarios and cycles, which can range from increased volatility, dislocation and disruption, increase or partial resolution of global military conflicts and new policies relating to trade, immigration, taxation and general business outlook. Investors are likely to continue positioning for this uncertainty by allocating to funds which have demonstrated their strategies’ versatility and robustness through recent volatility spikes and dynamic financial market cycles.”