HFR Global Hedge Fund Industry Report – Q1 2018 published

04/19/2018 Market Commentary

Download PDF:

Inflows into Event-Driven, Relative Value as investors reduce equity beta; Trend-following, quant CTAs attract capital despite 1Q volatility
CHICAGO, (April 19, 2018) – Hedge fund capital increased in the first quarter of the year, rising to a seventh consecutive record as investors reduced equity market beta in favor of M&A-focused Event-Driven (ED) exposures and fixed income-based Relative Value Arbitrage (RVA) strategies. Total hedge fund industry capital globally increased $4.5 billion to a new record of $3.215 trillion, according to the latest HFR Global Hedge Fund Industry Report, released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry.
Following inflows of nearly $10 billion for 2017, 1Q18 net inflows totaled $1.1 billion, with the gain moderated by a concentrated capital outflow within Equity Hedge strategies. This was the fourth consecutive quarter of positive fund flows, with the last outflow occurring in 1Q17. 
For 1Q18, the HFRI Fund Weighted Composite Index® posted a narrow gain of +0.14 percent, with strong January performance partially offsetting the impact of trade and tariff volatility later in the period. The gain for the HFRI topped the performance of most equity markets globally, including the S&P 500, DJIA, as well as European and Asian equities. The HFRI Asset Weighted Composite Index produced a higher return of +1.4 percent for 1Q18.
Event-Driven led capital inflows for 1Q18, as investors allocated toward M&A, Activist and credit-sensitive strategies while reducing equity market beta. Inflows into ED strategies totaled $4.4 billion in 1Q18, following a FY 2017 inflow of $10.0 billion, bringing total ED hedge fund capital to $835 billion. Special Situations led ED sub-strategy inflows, receiving $1.6 billion in new capital and raising ED: SS capital to over $380 billion. Activist and ED: Multi-Strategy funds received $814 million and $920 million in inflows, respectively. The HFRI Event-Driven (Total) Index returned +0.15 percent in 1Q18, while the HFRI Event-Driven Index (Asset Weighted) Index gained +0.73 percent.
Fixed income-based Relative Value Arbitrage strategies also experienced inflows in 1Q18, attracting $2.3 billion of new capital and increasing total RVA assets to $846.5 billion; the 1Q gains partially offset the 2017 capital outflows of $5.6 billion. RVA sub-strategy inflows were led by Fixed Income: Asset-Backed, with these receiving $1.5 billion.  The HFRI RV: Asset-Backed Index gained +2.2 percent in 1Q18, in line with the +2.2 percent return of the HFRI RV: Sovereign Index, as these two indices led RVA sub-strategy performance. The HFRI Relative Value (Total) Index climbed +0.3 percent for 1Q18, while the HFRI Relative Value (Asset Weighted) Index posted a higher return of +1.1 percent.
Macro hedge funds posted a small net asset inflow for 1Q18, as investor rotated out of discretionary commodity, fundamental and multi-strategy funds, and into quantitative, trend-following CTA strategies. Macro hedge funds experienced inflows of $909 million, bringing total Macro capital to $596.7 billion. Systematic Diversified CTA strategies received net inflows of $4.45 billion, which follows the FY 2017 inflow of $9.7 billion and brings total CTA capital to $306 billion. CTA inflows were offset by outflows in fundamental Discretionary Thematic ($1.8 billion), Commodity ($1.3 billion) and Multi-Strategy ($1.2 billion). 
The HFRI Macro (Total) Index fell -1.25 percent in 1Q led by declines in CTA strategies of -2.7 percent, though intra-quarter performance was volatile, with the Index gaining +2.8 percent in January before falling -3.5 percent in February. The HFRI Macro: Systematic Diversified Index jumped +4.0 percent in January before declining -6.2 percent in February, the worst month in the history of the CTA Index. The HFRI Macro (Asset Weighted) Index posted a narrow decline of -0.1 percent for 1Q18.
Continuing the trend of 2017, Equity Hedge strategies experienced an outflow for 1Q18, as investors reduced equity beta in favor of M&A and credit-sensitive strategies. Equity Hedge experienced an outflow of $6.57 billion in the first quarter, which follows the 2017 outflow of $5.4 billion. Despite the outflow, EH remains the industry’s largest strategy capital area with $937 billion. Fundamental Value led EH sub-strategy outflows with a concentrated outflow of $9.75 billion. This EH outflow was partially offset by Equity Market Neutral and Quantitative Directional funds, which experienced net inflows of $2.0 billion and $1.3 billion, respectively. The HFRI Equity Hedge (Total) Index led all main strategies in performance for 1Q18, gaining +0.6 percent, while the HFRI Equity Hedge (Asset Weighted) Index posted a higher return of +1.4 percent. EH sub-strategy performance was led by the HFRI: EH: Technology Index in 1Q18, which vaulted +4.8 percent for the quarter.
Flows favored smaller firms in 1Q18, as firms managing less than $1 billion in AUM received $2.8 billion in inflows, while firms managing greater than $5 billion experienced modest outflow of $330 million and firms managing between $1 to $5 billion saw outflows of $1.36 billion.
“The dominant trends in the hedge fund industry in 1Q18 included broader equity market outperformance and defensive positioning as it pertains to overall equity market valuation, as well as specific to the trade and tariff volatility which accelerated through the end of the quarter,” stated Kenneth J. Heinz, President of HFR. “Two additional trends which continued from 2017 include investor reallocation from equity beta to M&A and credit market exposures, and reallocation from fundamental Macro strategies towards quantitative, trend-following Macro. It is likely that these will continue to drive industry growth and performance through mid-2018.”