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Preqin analysts suggest this may see the asset class maintain its relevance by holding its allocation percentage in portfolios through 2024.

Hedge fund assets find room for growth in tough market conditions

The hedge fund asset class struggled in 2023, but rebounded from its 2022 performance. It returned 8% on an annualized basis in 2023, which nearly offsets negative returns in 2022. Overall, the global asset class returned just under 0% over the two years.

Hedge fund assets under management (AUM) were estimated at $4.37tn by the end of the third quarter of 2023 - increasing by 5% since 2022, as per Preqin data. Of that nine-month growth, the third quarter of 2023 accounted for the least with $9.2bn AUM added, compared to $111.1bn in the second and $72.8bn in the first quarter. The $9..2bn uptick in AUM in the third quarter was led by positive returns in event-driven and relative value strategies, and net inflows to niche funds and Commodity Trading Advisors - funds that advise on the trading of futures contracts. These trends worked to offset a negative quarter for equity funds, which also saw significant outflows.

Looking at capital flows in detail, the trend of net outflows from the hedge funds has persisted. Over the last five years ending September 2023, the average outflow for negative quarters was $23.8bn, while average inflows in positive quarters were $9.8bn, showcasing the extent of net outflows overall.

Niche hedge fund strategies gain traction

Despite the trend of net outflows from the asset class, hedge funds have demonstrated they can provide the downside risk protection asked of them by global investors in 2023.

Moreover, hedge fund strategies such as relative value, macro and niche - notably cryptocurrency-focused and insurance-linked securities (ILS) strategies - have proven adept at avoiding market volatility and providing downside risk protection for investors' capital. The ILS sub-strategy was the best performer out of all hedge fund sub-strategies in 2023, with an annualized return of 14.4%.

Fundraising under pressure in 2024

While the asset class showed resilience in 2023, Preqin analysts expect that investors' overallocation to hedge funds will put pressure on the latter's ability to hit fundraising targets in 2024.

US-based investors, which make up the majority of global hedge fund investors, had an average allocation of 16% of total assets as of the third quarter of 2023, compared to a target allocation of 12%. This 4% over-allocation will pose additional challenges to many hedge funds' fundraising efforts, Preqin analysts predict.

"Hedge funds are going through significant changes," says Charles McGrath, AVP, Research Insights at Preqin. "Even as they showed how they can help the larger portfolio, investors still do not seem comfortable with the asset class, as many are pulling capital out of hedge funds at a higher rate than they are committing capital. Industry-wide outflows will continue, but it will not be uniform. Top performers will stand above the fray. While some outflow numbers are glaring, North America is growing as a stronghold for the asset class and will continue to do so."

Additional key findings from the Preqin Global Report 2024: Hedge Funds include:

- Capital flows: Net hedge fund capital flows hit $6.4bn by the end of the third quarter of 2023, despite $4.9bn in net outflows in the third quarter alone. Equity strategies took $14.8bn in net redemptions during the quarter.

- Preqin's All Hedge Fund Index in 2023: By the end of the third quarter of 2023, the index fell by 0.9%, compared with global equities' fall of 4.3% in the same period. This provided downside protection of investor capital.

- Strategy focus: Global macro remains the largest strategy within hedge funds, with $1.3tn in AUM by the end of the third quarter 2023. Equity strategies were the second largest, with an estimated $1.1tn in AUM by the end of the third quarter this year.

- Niche strategies: Niche strategies represented 2% of total hedge fund AUM in 2023 by the end of September 2023, but demand (net inflows) has more than doubled in recent years. Niche strategies' AUM has risen from $41.4bn in March 2021 to $86.1bn by the end of September 2023.

Press release Bg

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