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Among other regional performance for Q3 2020, the HFM Asia-Pacific Index leads with a 9.4% performance followed by the HFM North America Index and HFM Europe Index with 4.5% and 3.1% returns respectively.

The hedge fund industry had a - relatively - uneventful Q3, as a dip in geopolitical drama backdropped net inflows and a solid three months' performance. The HFM Global Index may have lagged the S&P 500 by nearly four percentage points in Q3 (4.7% to 8.5%), but equity hedge funds were within touching distance (6.9%), all core strategies generated gains, and investors turned positive sentiment from Q2 into top-ups and allocations.

In fact, all core strategies saw net inflows across July and August, and if early indicators suggest September is to end net negative, the outflow will not be enough to prevent a positive quarter. Equity managers saw the biggest investor gains in August, adding almost $10bn. They, and credit/fixed income managers, are now the only core strategy groups with net inflows for the year. But if the top-level numbers are encouraging, there are also reasons for caution.

Investors are increasingly unwilling to take meetings going into the winter months and will focus on topping up products for which they have already done due diligence. In Q3, that contributed to an uptick in discontinued mandates and a slowing of launch activity. Q4 will likely feature more of the same.

Strong returns in July and August pared by September losses

The HFM Global Index finally returned to positive territory in Q3 (+4.7% YTD). Equity is the best performing strategy at 6.9% as continued central bank support and further fiscal intervention by governments around the world prolonged the equity market rally and enhanced equity hedge returns. Event-driven was the second best-performing core hedge fund strategy in Q3 (+4.3%) but remains in negative territory for the year.

Although Q3 did not see the dramatic swings witnessed in H1, it will have hammered home the mantra 'don't fight the Fed' as continued cheap money saw further asset price rises across the board. With a host of macro events on the horizon, including the US election, the Brexit endgame and potential progress on a Covid-19 vaccine, the final quarter promises to be anything but uneventful.

Biggest quarterly advance in assets for more than five years

Having experienced some of its largest outflows since the 2008 financial crisis in H1 2020, the hedge fund industry continued its recovery in Q3 by adding more than $160bn in July and August, including $40bn from investors. HFM estimates that, at the end of August, total industry AuM was $3.22trn and approaching its level from the end of 2019.

With industry performance negative for September, it would require net investor flows to maintain the direction of travel. Early indicators are that this was not the case. By region, investor flows have primarily benefited managers in Europe and Apac, with the former group now in net positive territory for the year.

North American managers are yet to see their progress reflected in the numbers; there are several large, secretive US businesses that reopened products to new and existing clients whose uptick in AuM will be captured in Q4. Equity and credit flows are now both net positive for the year. Macro trails among the core strategies.

Big launches absent in Q3 as due diligence challenge mount

Hedge fund launch numbers were encouraging in H1, but the absence of large new funds in Q3 suggests the pipeline is running dry. HFM tracked 219 launches in H1, the highest six-month total since H2 2018 and, once liquidations were factored in (206), the best since H1 2018 - the last time the industry net added funds during a half.

However, initial data for Q3 - including that none of the funds tracked by HFM's intel team met the threshold for the YTD top 10 - adds to anecdotal evidence suggesting further launch plans have been put on hold.

After a brief hiatus in March/April as national governments implemented lockdowns, a host of managers moved ahead with launches in Q2. This group was comprised of firms with long gestating plans and those that pivoted to take advantage of dislocations in the market and renewed investor interest.

But with Covid-19 infections rising once again, and an increasing number of investors reluctant to meet with or commit to new managers, it is highly likely that hedge fund launch numbers will be subdued well into 2021.