Hedge Funds Outperform the Broad Market in 2022

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According to Chicago-based hedge fund research and consulting firm HFR, hedge funds recorded a 0.4% loss in December, as equity markets fell on investor nervousness over future U.S. Federal Reserve policy.  Despite this drop, hedge funds were still able to outperform the overall equity markets in 2022.

December 2022 Hedge Fund Performance

According to data released recently, the HFRI 500 Fund Weighted Composite Index posted a modest loss of 0.38% in December 2022. This weakness increased the losses recorded by this hedge fund index to -3.16%.  Despite this performance, the HFRI 500 Fund Weighted Composite Index greatly outperformed the S&P 500 index which recorded an 18.11% loss during 2022.

Equity Hedge strategies, which invest long and short across specialized sub-strategies, was the  weakest performing hedge fund category during the month, as the HFRI 500 Equity Hedge Index fell 1.19% during December. This drop was paced by the -2.54% performance in the HFRI 500 EH: Quantitative Directional Index; the -1.49% decline in the HFRI 500 EH: Technology Index; and the -1.34% decline in the HFRI 500 EH: Equity Hedge: Long/Short Index.  Over 2022, the HFRI 500 Equity Hedge Index posted a loss of 12.60%.

Event-Driven strategies, which often focus on out-of-favor, deep value equity exposures and
speculation on M&A situations, also declined in December as the HFRI 500 Event-Driven Index fell -0.79% for the month.  The Equity-Driven sub-strategies which paced December’s hedge fund performance include the HFRI 500 ED: Activist Index which fell -2.55% for the month; the HFRI 500 ED: Special Situations Index which declined -2.24%; and the HFRI 500 Event Driven Directional Index which dropped -1.16%. Over the course of 2022, the HFRI 500 Event Driven Index posted a 6.74% decline.

Uncorrelated Macro strategies, on the other hand, rose 0.42% in December. Three Macro sub-strategies which posted the greatest strength during the month include the HFRI 500 Macro: Discretionary Thematic Index which rose 1.68%; the HFRI 500 Macro: Currency Index which rose 1.66% during the month; and the HFRI 500 Macro: Discretionary Directional Index which also rose 1.44%.  Throughout 2022, the HFRI 500 Macro Index rose 14.82%, making these type of hedge funds the best performing during 2022. 

Relative Value strategies also posted healthy gains during December as the HFRI 500 Relative Value Index rose 0.53% during the month.  This performance was paced by a 3.15% increase in the HFRI 500 RV: Fixed Income – Sovereign Index; a 0.90% increase in the HFRI 500 RV: Fixed Income Directional  Index; and a 0.75% rise in the HFRI 500 RV: Multi-Strategy Index.  Over the course of 2022, the HFRI 500 Relative Value Index posted a rise of 0.97%.

Our Take

Hedge funds posted a mixed performance in December to conclude a volatile 2022, though they still significantly outperforming the broad equity and fixed income markets as investors positioned themselves for continued macroeconomic uncertainty driven by generational inflation, rising interest rates, geopolitical risk, and a possible economic slowdown in 2023.

Despite this relative out performance, hedge fund investors were nervous throughout the year as they pulled their money from most fund strategies in 2022. According to eVestment, the total amount of assets redeemed by investors from hedge funds in the calendar year totaled approximately $100 billion, a total that is smaller than the net outflows seen in both 2016 ($112 billion) or 2019 ($102 billion).

Consistent with this trend, the estimated number of new hedge fund launches decreased to only 71 in 3Q22, a decline from the estimated 80 launches in 2Q22, representing the lowest launch rate since only 56 new funds launched in 4Q 2008 at the depths of the Global Financial Crisis. The number of hedge fund liquidations also declined over the prior quarter, as an estimated 145 funds closed their doors in 3Q22, down from 156 fund liquidations in 2Q22.  According to BarclayHedge, hedge fund industry AUM totaled $4,712.8 billion as of the 3rd Qtr 2022 – 1.8% below $4,797.6 bln AUM total reached in 2021.

This data reflects a mixed performance in the hedge fund industry as many investors have faced an extremely volatile 2022 creating nervousness among many institutional investors.  This uncertainty is likely to weigh on the hedge fund industry. As a result, we suspect that most hedge funds, who are the most aggressive users of sell side and independent research, are unlikely to boost payments to their external research providers any time soon. 

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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