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Hedge funds post outflows through mid-Q4

Thursday, December 18, 2014
Opalesque Industry Update - Increased financial market volatility, which began in late 3Q14, has accelerated through November, resulting in strategy capital rotation and redemptions by hedge fund investors despite performance gains4th -quarter-to-date (4QTD), which includes October and November 2014.

The hedge fund industry experienced a net outflow of $1.5 billion 4QTD, despite performance gains of +0.62% percent over this two-month period for the HFRI Fund Weighted Composite Index®, according to the special intra-quarter HFR Global Hedge Fund Industry Report: Mid-Fourth Quarter 2014, released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry.

Performance-based asset gains offset the estimated 4QTD outflow, resulting in a $29 billion net increase of hedge fund capital, and bringing total industry assets to a record $2.85 trillion as of November end. Capital redeemed from all funds which experienced outflows totaled $23.7 billion, which was mostly offset by subscription to all funds with inflows of $22.3 billion. Sixty percent of all funds experienced inflows in the two-month period, while the remaining 40 percent experienced outflows. The last quarterly outflows were in the fourth quarter of 2011, when the industry experienced an estimated net outflow of $127 million.

HFRI 4QTD gains were driven primarily by the HFRI Macro Index, which posted a gain of +2.3% over this period. Despite recent gains, Macro strategies led outflows, which were partially offset by inflows into Event Driven and Relative Value Arbitrage (RVA) strategies. Investors withdrew $6.32 billion from Macro strategies over October and November, despite performance gains across Commodity Trading Advisor and Currency exposures, bringing total Macro hedge fund capital to $544 billion. Systematic Diversified/CTA strategies were the largest component of these outflows, with CTAs experiencing net redemptions of $3.1 billion 4QTD. The HFRI Macro (Total) Index has gained +5.6 percent year-to-date (YTD) through November, leading all hedge fund strategies, inclusive of a +9.6 percent YTD return from the HFRI Systematic Diversified/CTA Index. The HFRI Macro (Total) Index has gained +2.3 percent 4QTD, while CTAs have gained +4.6 percent over the same two-month period.

Despite recent volatility in Event Equities and Fixed Income, investors increased allocations to these strategies, adding $3.2 billion to Event Driven and $3.5 billion to RVA 4QTD, bringing total capital in these strategies to $758 billion and $759 billion, respectively. The HFRI Event Driven Index has gained +1.5 percent YTD, despite a decline of -1.0 percent 4QTD, while the HFRI RVA Index has gained +4.4% YTD, despite a decline of -0.5 percent 4QTD. Investors allocated an estimated $2.6 billion to Activist strategies and $2.1 billion to RV: Multi-Strategy funds 4QTD. The HFRI Equity Hedge Index posted a gain of +0.55 percent 4QTD, but Equity Hedge funds nonetheless experienced a net outflow of $1.85 billion.

Mid-quarter outflows were concentrated in the industry’s largest funds, with firms managing over $5 billion experiencing net outflows of $7.13 billion over the two-month period. Firms managing between $1 billion and $5 billion experienced net inflows of $3.97 billion, while firms below $1 billion experienced inflows of $1.67 billion.

“After several years of strong equity beta gains, falling volatility and increasing investor risk tolerance, increased volatility originating from the Energy and Commodity sector has been a catalyst for increases in volatility across most asset classes, with sharp increases across Emerging Markets, Currency and Equities going into year end,” stated Kenneth J. Heinz, President of HFR. “While the speed and extremity of these moves may have surprised some investors, resulting in modest capital withdrawals, many hedge funds, particularly those in Macro, quantitative and trend-following/CTA spaces, have been effectively positioned for this, providing valuable hedged portfolio exposures through the more challenging environment which has quickly developed. While the source of the volatility may evolve, hedge funds which have effectively navigated this volatility paradigm shift are likely to benefit their investors and attract new capital into early 2015.”

HFR (Hedge Fund Research, Inc.)

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