Total hedge fund capital through the third quarter increased to a $3.15 trillion, up $50 billion over the April-to-June period and the fifth straight record quarterly level, Hedge Fund Research reported last week.
Steady performance and investor inflows drove the increase, HFR said, as global economic growth prospects improved despite continued elevated geopolitical risks.
Global fund managers surveyed in October said they expected stronger global growth in the coming year. They also cited a policy mistake from the Federal Reserve/European Central Bank and North Korea as the top two tail risks.
HFR said its HFRI Fund Weighted Composite Index gained 2.3% in the third quarter, and was up 5.9% for the first nine months of the year.
“The hedge fund industry continued the powerful process of performance, growth, expansion and evolution which has defined recent quarters, including investor-friendly trends toward lower fees and improved liquidity, as well as the proliferation of regulated vehicles and alternative beta strategies,” HFR president Kenneth Heinz said in a statement.
“Following 18 months of strong equity market and hedge fund performance, many institutions and investors continue to explore the increased use of alternatives and alternative beta as mechanisms to insulate portfolios from potential market corrections and to increase the likelihood of achieving their required returns.
Heinz predicted that these trends would continue through year-end, driving industry growth into 2018.
The HFR report said third-quarter net investor inflows of $1.7 billion slowed over the previous quarter but remained positive, as allocations offset both investor redemptions and the return of investor capital by certain managers.
The year-to-date inflow total of $2.5 billion represents a sharp reversal from the $70 billion of investor outflows in 2016.
Macro strategies received the largest inflows for the third quarter, net $4.2 billion, despite posting only a narrow performance gain for the period. Currency funds and quantitative, trend-following commodity trading advisors led investor inflows, with allocations of $2 billion and $1.8 billion of new capital.
Total macro capital now amounts to $587 billion.
Event-driven managers experienced inflows of $3.5 billion for the third quarter, offsetting the same amount of outflows from the prior quarter. Year-to-date inflows amount to $3.1 billion, and total event-driven capital stands at $815 billion.
Activist event-driven strategies received $2.3 billion of net inflows, while distressed ones netted $1.5 billion.
Other managers experienced outflows in the third quarter, according to HFR.
Equity hedge strategies had a net capital outflow as investors reduced portfolio beta and exposure to record equity markets. Investors redeemed some $2.9 billion, increasing the net outflow to $3.4 billion for the year to date.
Despite the quarterly outflow, total equity hedge capital increased to a record $919 billion on the surge of strong performance, making it the industry’s largest area of capital.
The HFRI Equity Hedge (Total) Index gained 3.4% in the July-to-September quarter and is up 9.8% year to date, leading all main strategy performance.
Fixed income-based relative value arbitrage strategies also experienced a net outflow in the third quarter, as investors redeemed $3.1 billion. For the third consecutive quarter, credit multi-strategy funds experienced outflows, bringing net redemption so far this year to $9.7 billion.
Despite redemptions, relative value arbitrage total capital increased to a record $830 billion.
Flows by firm size continued to give a slight edge to both the biggest and smallest funds in the industry in the third quarter, the report said.
Firms managing more than $5 billion received an estimated $1.2 billion, while those with less than $1 billion under management also had inflows of $1.2 billion.
For their part, firms managing between $1 billion and $5 billion experienced an outflow of $700 million.
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