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Hedge funds returned 0.4% in Q3, up 9.5% YTD, after a difficult September for equity markets

Tuesday, October 19, 2021
Opalesque Industry Update - The HFM Global Index gained 0.4% in Q3, despite the S&P 500 posting its worst month since the start of the pandemic. The equity market falls in September and ongoing macroeconomic challenges saw equity and macro hedge funds finish the quarter in negative territory (-0.6% and -0.9%, respectively). Relative value/arbitrage funds led industry gains, up 1.8%, more than double the second-best performing top-level strategy (managed futures).

Inflows pick up in August There was an influx of new capital from investors in August after net outflows in July and June. The latest data (through August) put Q3 inflows at net $16.8bn and YTD at net $60.8bn, a notable turnaround from 2020's outflows of $40bn. Equity funds have been the main beneficiary of renewed investor confidence in hedge funds; their inflow of $23.8bn YTD already matching 2020's total of $23.5bn.

Fixed income and macro funds continue to struggle in the current economic conditions with outflows of $6.8bn and $2.4bn YTD, much less than the total of $31.4bn between them in 2020 but still a harbinger of limited opportunities in these strategies. Overall, most $1bn+ AuM funds (58%) had positive inflows during 2021 versus 49% of funds with less than $1bn in AuM.

With economic recovery gathering pace, particularly in the Asia-Pacific region, funds that are positioned for this uptick will enjoy continued gains as Q4 progresses. Those that can build on their Q3 performance will have a compelling narrative to tell investors as 2022 begins. This will be yet another example of the pandemic accelerating existing trends in global markets.

However, long/short equity strategies face an uncertain end to the year off the back of September's selloff. Managers have struggled to find quality shorting opportunities despite turmoil in the energy markets and the write-down of tech stocks. Stable, relatively low gas prices are pivotal for the functioning of the US economy, and the return of inflation, however allegedly transitory, will give allocators more reason to trust the performance of resilient, experienced managers.

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