According to Chicago-based hedge fund research and consulting firm HFR, assets under management in the global hedge fund industry rose by $50 bln to $3.88 trillion in 1Q23 – the second consecutive quarterly gain in hedge fund AUM.
HFR’s Latest Hedge Fund Industry Report
In its latest Hedge Fund Industry Report, HFR reported that total global hedge fund capital rose to $3.88 trillion in 1Q23, a quarterly increase of over $50 billion. Part of this gain included an estimated $9.1 billion in new capital inflows to the hedge fund industry, the first quarter of net asset inflows since 1Q 2022.
Asset inflows for 1Q23 were distributed across firms of all sizes with firms managing more than $5 billion, experiencing an estimated net asset inflow of $7.4 billion. Firms managing between $1 billion and $5 billion saw an estimated net inflow of $1.3 billion for quarter, while investors allocated an estimated $330 million to firms managing less than $1 billion in 1Q23.
The investable HFRI 500 Fund Weighted Composite Index gained in +0.52% in 1Q23, led by directional Equity Hedge and Event Driven strategies. These two hedge fund strategies successfully navigated the difficult market environment marked by bank collapses, overall weakness in regional banks, and the government-led acquisition of Credit Suisse by UBS.
Total capital in Equity Hedge (EH) strategies increased by approximately $33 billion to end 1Q23 at $1.11 trillion, driven by strong performance-based gains and an estimated net asset inflow of $3.3 billion. EH sub-strategy asset increases were driven by Fundamental Value funds, which added $21.9 billion in 1Q23 on strong performance and an estimated net asset inflow of $3.1 billion. The investable HFRI 500 Equity Hedge Index gained +2.9% in 1Q23, leading all hedge fund strategies for the quarter.
Event-Driven (ED) strategies, which often focus on out of favor, often heavily shorted, deep value equity and credit positions, experienced an estimated asset increase of $18.4 billion in 1Q, raising total ED capital to $1.054 trillion. ED sub-strategy asset increases were concentrated in ED: Special Situations, which added $4.8 billion in 1Q23, and Activist strategies, which increased by $7.5 billion. The investable HFRI 500 Event-Driven Index rose +1.1% in 1Q23, while the HFRI Event-Driven (Total) Index added +1.72% for the quarter.
Hedge fund capital managed by credit- and interest rate-sensitive fixed income-based Relative Value Arbitrage (RVA) strategies increased by $12.9 billion in 1Q23, raising total RV capital to $1.05 trillion. RVA: Multi-Strategy funds led sub-strategy asset increases in 1Q23, adding an estimated $8.6 billion of capital to end the quarter at $643 billion. The investable HFRI 400 (US) Relative Value Index gained +1.0% in 1Q23, led by the HFRI 400 (US) RV: Multi-Strategy Index, which advanced +1.55% for the quarter, while the HFRI Relative Value (Total) Index added +1.2% in 1Q23.
Performance-based losses more than offset an estimated net asset inflow of $3.4 billion to Macro funds in 1Q23, as total AUM in Macro strategies declined by $14.3 billion to end 1Q23 at $663.3 billion. Macro sub-strategy asset declines were driven by Systematic Diversified CTA strategies, which fell $7.1 billion on performance-based losses to end the quarter with an estimated $320.1 billion AUM. The HFRI 500 Macro Index fell -3.5% in 1Q23, with negative contributions from Quantitative, Trend-Following CTA strategies, as well as weakness in short fixed income positions. The investable HFRI 500 Trend Following Index fell -4.2% in 1Q23.
Our Take
Despite extreme volatility in the equity markets brought on by US bank collapses, regional bank weakness, and the government forced takeover of Credit Suisse by UBS, investors saw hedge funds to be safer alternatives than many other investments. Consequently, investors increased their allocation to most hedge fund strategies during the 1Q23, pushing overall hedge fund AUM to $3.8 trillion.
Kenneth J. Heinz, President of HFR explained hedge funds’ 1Q23 performance saying, “Investors allocated new capital to hedge funds in 1Q as bank and financial risk surged, the likelihood of an economic recession increased while the ongoing macroeconomic risks associated with generational inflation and geopolitical risks associated with the ongoing conflict in Ukraine and currency/global trade evolved and remained fluid. Led by directional strategies, the industry navigated this complex cycle of disruption and dislocation to preserve capital and generate positive performance for the quarter.”
We suspect that as long as inflation pressures continue and expectations of a global recession in 2023 continue to grow, investors are likely to raise their allocations to hedge funds in order to offset the risk associated with other assets.