Hedge fund capital surged beyond the historic $4tn milestone to begin 2024, with investors remaining focused on inflation, higher interest rates, and macroeconomic uncertainty, but increasingly much more focused on uncertain geopolitical risk and acceleration in M&A.
Total hedge fund assets increased for the fifth consecutive quarter in Q4 2023, rising to an estimated $4.11tn, representing a quarterly increase of over $112bn, according to HFR’s latest Global Hedge Fund Industry Report. The growth in hedge fund capital was driven by strong Q4 performance-based gains and net of a $24.5bn net outflow in Q4 as investors reduced exposure to uncorrelated macro strategies.
The HFRI Fund Weighted Composite Index advanced 7.6% in 2023, led by directional equity hedge and event-driven strategies, with gains driven by exposure to technology/AI, as well as late year acceleration in M&A, both of which are likely to extend through early 2024. The HFR Cryptocurrency Index surged 37.8% in Q4, increasing its FY 2023 return to 65.2%.
Event-driven (ED) strategies, which categorically focus on out of favour, often heavily shorted, deep value equity and credit positions, experienced an estimated asset increase of $62.3bn in Q4, raising total ED capital to a record $1.158tn. ED sub-strategy asset increases were once again concentrated in higher beta special situations and shareholder activist strategies, with these increasing by $30.5bn and $16.8bn respectively in Q4. For 2023 overall, total ED capital increased by an estimated $123.1bn, inclusive of a modest $540m net asset inflow for the year; the HFRI Event-Driven (Total) Index gained 10.4% in 2023, led by the HFRI ED: Activist Index, which surged 18.1%.
Capital managed by equity hedge (EH) strategies also surged in Q4 and was the leading area of strategy performance in 2023, with total EH capital rising by an estimated $49.6bn to end the year at $1.181tn. EH sub-strategy asset increases were led by fundamental value funds in Q4, which increased by an estimated $33.0bn for the quarter, bringing total EH fundamental value capital to $670bn. The HFRI Equity Hedge (Total) Index led all strategy indices for 2023 with a gain of 10.54%, as total EH capital increased by an estimated $107bn in 2023, despite a small investor outflow of $2.3bn.
Hedge fund capital, managed by credit- and interest rate-sensitive fixed income-based relative value arbitrage (RVA) strategies, also increased in Q4 as interest rates increases levelled off during the quarter, following the historic pace of increases over the past two years. RVA capital increased by an estimated $22.9bn in Q4, raising total RV capital to an estimated $1.10tn. Multi-strategy funds, meanwhile, led RVA asset increases in Q4, adding an estimated $13.6bn of capital to end the quarter at $675bn. The HFRI Relative Value (Total) Index gained 7.0% for 2023 with RVA sub-strategy performance led by the HFRI RV: FI-Sovereign Index, which advanced 9.5% for the year; total RVA capital increased by an estimated $62bn in 2023 despite investor capital flows being largely flat that year.
Uncorrelated macro strategies posted a narrow decline in 2023, with the HFRI Macro (Total) Index falling 0.6% for the year, with mixed performance across fundamental and quantitative strategies. Total macro capital declined by an estimated $22.4bn in Q4, inclusive of net asset outflows of $12.2bn for the quarter, reducing total macro strategy capital to $670.5bn. Macro sub-strategy asset decreases were led by quantitative, trend-following systematic diversified CTA strategies, which decreased by an estimated $16.6bn in Q4. Divergent 2023 macro sub-strategy performance was led by the fundamental HFRI Macro: Discretionary Thematic Index, which gained 4.8 for the year, while declines were led by the HFRI Macro: Systematic Diversified Index, which fell 3.9%. Total macro capital declined by an estimated $7.1bn in 2023, inclusive of net asset outflows of $7.9bn for the year.
Reflective of the general financial market volatility that characterised 2023, capital flows for 2023 were unfavourable to the industry’s smallest funds, with firms managing less than $1bn experiencing estimated net outflows of $10.2bn for the year. Mid-sized firms managing between $1bn and $5bn experienced a smaller outflow of $2.0bn for 2023, while the industry’s largest firms managing greater than $5bn received an estimated net inflow of $2.7bn in 2023.
