This analysis is by Bloomberg Intelligence Senior Analyst Alison Williams and Associate Analyst Neil Sipes. It appeared first on the Bloomberg Terminal.
Redemptions, asset values and performance detracted from hedge-fund industry balances in 2022, with funding costs an added deterrent to leverage, we expect. The net is a reduced outlook for industry fees, though global uncertainty should provide some support to client demand, and certain funds have the opportunity to gain share.
Outflows similar to 2Q, equity hedge moderate
Hedge fund outflows of $26 billion in 3Q were about similar to the $27.5 billion in 2Q, dragging the year down after $19.8 billion of inflows in 1Q. Equity-hedge strategies had notable redemptions of $12.4 billion, which lessened from 2Q’s $18.5 billion. Equity Market Neutral’s $3.5 billion of outflows, and Fundamental Growth’s $3.2 billion contrast with the leading $14.7 billion in fundamental value in the prior quarter. Event-driven strategies held up better, with $583 million of 3Q outflows after $2.6 billion in 2Q. The two categories also had performance-based declines leading assets lower, while fixed-income-based Relative Value Arbitrage (RVA) and Macro strategies increased assets.
Investment gains biggest long-term driver of hedge fund assets
Hedge Fund outflows of $26 billion in 3Q, along with negative industry performance, helped to drive industry assets modestly lower to $3.78 trillion, about similar to the level of 1Q21. Assets compare to the record $4.04 trillion reached in October 2021. Inflows and market gains drove a boost last year from $3.6 trillion in 2020. Investment gains have driven the vast majority of asset growth for hedge funds in the past decade or so, with $138 billion of newly allocated capital since 2010 through year-end 2021 vs. almost $2 trillion in performance gains. In 2021, the $15 billion of inflows were dwarfed by $410 billion of performance gains.
In 2022, about $200 billion of investment losses through 3Q well exceed around $34 billion of net outflows.
Macro assets gained most through 3Q
Macro strategy assets grew by $8 billion in 3Q, aided again by performance-based gains to end the quarter at $711 billion (19% of industry total vs. 16% in 2021). Asset increases were led by fundamental, discretionary strategies ($2.7 billion increase), while quantitative, trend-following Commodity Trading Advisors (CTA) strategies increased $2.2 billion to about $361-$362 billion. The HFRI Macro Total Index gained 10.5% year-to-date, outperforming the 13.8% loss for the HFRI Equity Hedge Total Index by over 24 percentage points. Still, assets are less than the $1.04 trillion for equity hedge, $1.03 trillion for RVA and $1 trillion for ED.
By fund size, larger firms outperformed, with a 3% year-to-date for the HFRI Asset Weighted Composite Index through November, compared with a 6.3% loss for the equal-weighted version.
Bigger hedge funds outperformed in 2022
Larger hedge funds outperformed in 2022 based on the latest data through November. This could aid demand and market share, though funds of all sizes posted outflows in 3Q and year-to-date. Firms managing over $5 billion had $18.9 billion (73%) of hedge fund outflows in 3Q, based on HFR data. The net was $21.7 billion year-to-date vs. about $1.9 billion for small funds, while midsize funds had $10.2 billion of outflows. Extending the analysis back to 3Q20, net nil for large funds compare with $4.9 billion inflows for smaller and $7.5 billion of outflows for midsize funds.
Most of the flows in the 2010s went to funds with managed assets of over $5 billion, based on data from a BCG report, with $142 billion vs. $33 billion for funds managing less than $100 million. Funds of $500 million-$5 billion had $98 billion in outflows.
Bloomberg
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