10/19/2017 Market Commentary

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HFRI posts eleventh consecutive monthly gain to enter 4Q17; Active capital rotation into alternatives as equities reach record levels
CHICAGO, (October 19, 2017) – Steady performance and investor inflows through 3Q17 increased total hedge fund capital to a 5th consecutive record quarterly level, as global economic growth prospects improved despite continued elevated geopolitical risks. Total hedge fund industry capital rose to a record $3.15 trillion, an increase of $50 billion over the prior quarter, as reported today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry. The HFRI Fund Weighted Composite Index® gained +2.3 percent in 3Q17 and is up +5.9 percent YTD, led by the HFRI Equity Hedge (Total) Index, which has climbed +9.8 percent YTD.
Net investor inflows of $1.7 billion slowed over the prior quarter but remained positive, as allocations offset both investor redemptions and the return of investor capital by certain managers. Though the YTD inflow total of $2.5 billion remains muted, it represents a sharp reversal from the $70 billion of investor outflows in 2016.
Continuing the trend from the prior quarter, Macro strategies led inflows for 3Q, despite posting only a narrow performance gain for the period. Currency and quantitative, trend-following CTA strategies led investor inflows, with investors allocating $2 billion and $1.8 billion of new capital to these, respectively. Macro funds collectively received net inflows of $4.2 billion for 3Q17, bringing YTD inflows to $10.2 billion and total Macro capital to $587 billion. The HFRI Macro (Total) Index posted a narrow gain of +0.4 percent for the third quarter, though the Index has declined -0.4 percent YTD for 2017.
Led by dynamic Activist strategies, Event Driven experienced inflows of $3.5 billion for 3Q17, offsetting similar outflows from the prior quarter, bringing YTD inflows to $3.1 billion, and increasing total ED capital to $815 billion. ED sub-strategy inflows were led by Activist strategies, which received $2.3 billion of net inflows, while Distressed strategies received $1.5 billion. The HFRI Event-Driven (Total) Index was up +2.1 percent in 3Q17, bringing YTD performance to +6.2 percent.
Equity Hedge strategies experienced a net capital outflow in 3Q17 as investors reduced portfolio beta and exposure to record equity markets. An estimated $2.9 billion was redeemed from EH strategies in 3Q, increasing the YTD net outflow to $3.4 billion. Despite the quarterly outflow, total EH capital increased to a record $919 billion on the surge of strong performance, maintaining EH as the industry’s largest area of capital. An outflow of $6.6 billion from EH: Fundamental Value strategies were only partially offset by $1.9 billion of inflows into EH: Quantitative Directional. The HFRI Equity Hedge (Total) Index gained +3.4 percent in 3Q17 and is up +9.8 percent YTD for 2017, leading all main strategy performance. The HFRI EH: Healthcare Index leads all sub-strategy performance YTD with a gain of +16.9 percent.
Fixed income-based Relative Value Arbitrage strategies also experienced a net outflow in 3Q17, with investors redeeming $3.1 billion, though total RVA capital increased to a record $830 billion. Investors reduced exposure to credit multi-strategy funds in 3Q, as these saw an estimated $3.4 billion of outflows, representing the third consecutive quarter of outflows, and bringing YTD net redemption to $9.7 billion. Only partially offsetting this, RVA: Sovereign strategies experienced an inflow of $650 million in 3Q17. 
HFR also began tracking the performance of Risk Parity strategies in 3Q17, with the HFR Risk Parity Vol 15 Index gaining +5.0 percent in 3Q17 and +12.4 percent YTD. HFR estimates that approximately $110 billion of hedge fund capital is managed in Risk Parity strategies.
Flows by firm size continued to slightly favor both the largest and smallest funds in the industry, with firms managing greater than $5 billion receiving an estimated $1.2 billion in 3Q, while those managing less than $1 billion collectively also experienced inflows of $1.2 billion. Firms managing between $1 and $5 billion experienced a small outflow of $700 million.
“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,” stated Kenneth J. Heinz, President of HFR. “Following eighteen 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. We expect these trends to continue through year-end, driving industry growth into 2018.”