According to Chicago-based hedge fund research and consulting firm HFR, capital inflows totaled $19.8 bln into hedge funds during the first quarter of 2022 – the largest quarterly inflow since the second quarter of 2015, spurred by powerful trends in inflation, interest rates and corporate transactions.
1Q 2022 Hedge Fund Performance
According to data release recently, total capital inflows reached $19.8 billion in 1Q 2022, the highest quarterly inflow into hedge funds since 2Q 2015, as reported today by HFR. Total global hedge fund industry capital at the end of the quarter remained above the key $4 trillion level.
Despite the record net inflow of money, hedge funds ended the first quarter of this year down 0.78% as measured by the HFRI Fund Weighted Composite Index, whereas the investable HFRI 500 Fund Weighted Composite Index posted a narrow gain of +0.3% for 1Q22 . In comparison, the S&P 500 index plunged 4.60% over the same period.
Uncorrelated Macro strategies, posted the strongest gains among hedge fund strategies during the 1Q22 as the HFRI 500 Macro Index rose 9.08%. One Macro sub-strategy which performed particularly well during 1Q22 was the HFRI 500 Macro: Commodity Index which surged 23.97% on continued robust US inflation. The HFRI 500 Macro: Systematic Diversified Index and the HFRI 500 Macro: Systematic Directional Index both posted an 11.73% gain during the quarter.
Relative Value strategies also rose during 1Q22 as the HFRI 500 Relative Value Index gained 1.73% during the quarter. This performance was paced by a 7.11% surge in the HFRI 500 RV: Multi-Strategy Index. The weakest sub-strategy in this category of hedge funds was the HFRI 500 RV: Fixed Income – Sovereign Index which recorded a 2.45% drop during 1Q22.
Equity Hedge strategies, which invest long and short across specialized sub-strategies, was the weakest performing hedge fund category, as the HFRI 500 Equity Hedge Index fell 4.12% during the 1Q22. This weakness was paced by a 8.54% drop in the HFRI 500 EH: Healthcare Index, and a 7.00% decline in the HFRI 500 EH: Fundamental Growth Index.
Regional fund strategies delivered a weak performance in the 1Q22 as the HFRI 500 Emerging Markets Index posted a 3.68% drop during the quarter.
As has been the case for quite some time, the industry’s largest hedge funds, those managing greater than $5 billion, led investor inflows, with these receiving an estimated $16.8 billion of net new capital in 1Q22. Firms managing between $1 billion and $5 billion experienced net inflows of $2.3 billion, while firms managing less than $1 billion received estimated net inflows of $723 million over the quarter.
Kenneth J. Heinz, President of HFR commented on the industry’s recent performance, saying, “Institutional investors are likely to continue increasing their commitment to funds combining effective, volatility-positive, capital preservation with managers offering opportunistic exposure to interest rate and inflation trends, with these effectively complementing existing portfolio holdings and duration. Funds tactically positioned to navigate these multi-asset trends are likely to lead industry performance and growth through mid 2022.”
Our Take
Russia’s invasion of Ukraine during February and the sharp rise in inflation seen over the past few months has prompted significant financial market volatility, a development which led to sharp losses in both the global equity and fixed income markets. These factors enabled macro hedge fund managers to post impressive gains during the 1Q22.
The relative outperformance seen from hedge funds during the first quarter of 2022 leads us to be modestly optimistic about the institutional research marketplace as hedge funds are traditionally the most aggressive users of sell-side and independent research. As a result, we suspect that many of the best performing hedge funds will continue to reward their favorite sell-side and independent research firms with higher research payments.
Unfortunately, most long only asset managers have not increased their payments to sell-side and independent research providers in the past few quarters as they are hamstrung by lower research budgets resulting from MiFID II. These conflicting trends suggest that most sell-side and independent research providers are likely to continue to market and service their most profitable hedge fund customers in contrast to their less lucrative long-only customers.