2Q performance drives capital to highest level in 12 months; Investor outflows fall by nearly half over 1Q
CHICAGO, (July 20, 2016) – Global hedge fund capital increased in 2Q16, recovering the decline from the prior quarter and rising above the year-end 2015 level to reach the 3rd highest quarterly capital total on record, 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. The industry navigated volatility and dislocations related to Brexit in late 2Q to post asset gains for both 2Q and 1H16. Total hedge fund capital rose to $2.898 trillion as of June 30, an increase of $42.06 billion during the quarter, as the HFRI Fund Weighted Composite Index® gained +2.0 percent in 2Q.
The current capital level was only surpassed in 1Q15 and 2Q15, at which time capital peaked at a record $2.969 trillion, before falling into year-end 2015. Investor redemptions declined to $8.2 billion in 2Q16, decreasing by nearly half of the $15.1 billion outflow in the prior quarter, though 2Q represents the 3rd consecutive quarterly outflow for the hedge fund industry.
Event Driven (ED) led all hedge fund strategies in capital increases in the quarter. Performance-based gains drove total ED capital to $743.1 billion, a quarterly increase of $13.1 billion, as the HFRI Event Driven Index gained +2.8 percent in 2Q16. However, ED experienced net investor outflows of $3.5 billion in the quarter, concentrated in Special Situations and Distressed/Restructuring sub-strategies, though these were partially offset by net inflows into Merger Arbitrage and ED: Multi-Strategy funds.
Fixed income-based Relative Value Arbitrage (RVA) strategies posted similar performance-driven asset gains in 2Q, as the HFRI Relative Value Index added +2.9 percent in the quarter, vaulting total RVA capital to $784.4 billion, nearing the record level of RVA capital set in 2Q15. Investors redeemed a net $1.6 billion from RVA hedge funds in 2Q, paring the 1H16 inflow for the strategy to $3.7 billion. By sub-strategy, 2Q outflows were led by redemptions from FI: Asset-Backed and Convertible Arbitrage funds, while first half 2016 inflows were led by FI: Sovereign and RV: Multi-Strategy hedge funds.
The HFRI Macro Index gained +1.68% in 2Q, increasing total capital invested in Macro strategies to $557 billion, its highest asset level since 1Q15. Macro hedge funds experienced a net investor outflow of $2.6 billion in 2Q, although this represents nearly a two-thirds decline from the $7.3 billion redeemed in the prior quarter. By sub-strategy, capital in Systematic Diversified/CTA funds rose to $270 billion, also its highest asset level since 1Q15, on quarterly inflows of $1.4 billion; these were offset by outflows in Discretionary strategies. Macro strategies led all hedge fund performance in 1H16 on strong Brexit market reaction, as the HFRI Macro Index gained +3.3 percent, while the HFRI Macro: Systematic Diversified/CTA Index added +4.1 percent.
Hedge fund capital invested in Equity Hedge (EH) funds, the industry’s largest strategy area by capital, rose to $813.9 billion in 2Q, an increase of $7.5 billion from the prior quarter, though total EH assets remain below the YE 2015 level of $829 billion. EH strategies experienced a modest outflow of $345 million in 2Q16, bringing total 1H16 outflows to $5.0 billion. Investors allocated $2.4 billion of net new capital to Equity Market Neutral funds in 2Q, bringing 1H inflows to $5.0 billion for this sub-strategy, though these were offset by outflows from Fundamental strategies over the quarter and entire first half of 2016. The HFRI Equity Hedge Index gained +1.4 percent in 2Q, though the Index remains down -0.4 percent YTD through June.
Capital flows in 2Q were propelled by several large fund liquidations, resulting in a net outflow to the industry’s largest firms (firms with greater than $5 billion in AUM) of $4.4 billion. Firms managing between $1 and $5 billion experienced a similar outflow of $4.01 billion, while approximately $360 million of net new capital was allocated to firms managing less than $1 billion.
“Hedge fund industry growth accelerated in 2Q, posting the strongest quarterly asset growth since the first quarter of 2015, driven by strong quantitative CTA gains on Brexit Friday and broad-based industry wide gains across equity, commodity and currency markets pursuant to the Brexit dislocations,” stated Kenneth J. Heinz, President of HFR. “Institutional investors are actively seeking exposures which preserve capital, generate positive carry, provide opportunities during market dislocations, and assist them in achieving their respective required rates of return on capital. Hedge funds which have demonstrated these are likely to attract new investor capital and lead industry growth through a likely volatile 2H16.”
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HFR (Hedge Fund Research, Inc.) is the global leader in the alternative investment industry, specializing in the indexation and analysis of hedge funds. Established in 1992, HFR produces the HFRI, HFRX and HFRU Indices, the industry’s most widely used benchmarks of global hedge fund performance. HFR calculates over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus. HFR Database, a comprehensive resource available for hedge fund investors, includes fund-level detail on historical performance and assets, as well as firm characteristics on both the broadest and most influential hedge fund managers. HFR has developed a detailed fund classification system, enabling granular and specific queries for relative performance measurement, peer group analysis and benchmarking. The HFR suite of analysis products leverages HFR Database to provide detailed, current, comprehensive and relevant aggregate reference points on all facets of the hedge fund industry. HFR also offers consulting services for clients seeking customized top-level or more sophisticated analysis. For the hedge fund industry’s leading investors and hedge fund managers, Hedge Fund Research is The Institutional Standard.