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HFR Kenneth J Heinz

Hedge funds see largest annual increase since 2014

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HFR’s latest report finds that total hedge fund industry capital rose for the third consecutive quarter, surpassing the USD3 trillion milestone for the first time.

Total assets increased by USD46.8 billion in 4Q16, ending the year at USD3.02 trillion, the second consecutive quarterly record for industry capital. For the full year 2016 (FY16), total hedge fund industry capital increased by USD121 billion, the largest annual increase since 2014.

The growth of hedge fund assets occurred against a challenging backdrop of continued investor withdrawals, as redemptions totalled USD18.7 billion in 4Q16 (0.63 per cent of industry assets at the beginning the quarter), a decline from the 3Q outflow of USD28.2 billion. For the full year 2016, investors redeemed USD70.1 billion (2.4 per cent of industry assets at the beginning of the year), the largest annual outflow since 2009, when USD131 billion was withdrawn. The HFRI Fund Weighted Composite Index (FWC) gained +5.5 per cent for 2016, the best return since 2013, topping that of global equities and surpassing the annualised return of the FWC over the past five and 10 years.
 
Led by performance-based gains, Event Driven (ED) strategies led asset growth in 4Q, with these funds increasing by USD14.8 billion to USD777.2 billion; for 2016, total capital invested in ED increased by USD32.4 billion. The HFRI Event-Driven (Total) Index led strategy performance for 2016 with a gain of +10.5 per cent, driven by Distressed, Activist and Special Situations exposures. Despite this, investor withdrawals from ED strategies continued, totalling USD10.8 billion in 4Q and USD38.2 billion for 2016, leading strategy outflows over both time periods. ED sub-strategy outflows for FY16 were concentrated in Special Situations at USD18.7 billion, which were only partially offset by inflows of USD2.1 billion into Merger Arbitrage.
 
Also driven by strong performance, fixed income-based Relative Value Arbitrage (RVA) strategies saw the largest asset increase for FY 2016, with total RVA capital up USD12.9 billion in 4Q and USD43.9 billion for FY16 to end the year at USD816.8 billion, the industry’s second largest strategy by assets. The HFRI Relative Value (Total) Index gained +7.8 per cent for 2016, the strongest gain since 2012, led by Yield Alternatives and Corporate Fixed Income exposures. RVA experienced modest capital outflows for 4Q and FY16, totaling USD1.4 and USD1.7 billion, respectively. RVA net asset flows by sub-strategy in 4Q were led by inflows of USD1.6 billion into Corporate Fixed Income, which were partially offset by withdrawals of USD865 million from Asset Backed exposures.
 
Capital invested in Equity Hedge, the industry’s largest strategy area by capital, increased by USD7.5 billion in 4Q and USD20 billion for FY16, rising to a record USD849 billion. The HFRI Equity Hedge (Total) Index gained +5.5 per cent for 2016, led by exposures to Energy/Basic Materials and Fundamental Value strategies. However, investors withdrew USD6 billion from Equity Hedge funds in 4Q and USD20.5 billion for 2016, with FY outflows by sub-strategy led by Fundamental Value strategies, which experienced USD17 billion in outflows, and Fundamental Growth strategies, which saw USD11 billion in outflows. These were only partially offset by inflows into Quantitative Directional strategies of USD4.7 billion and Equity Market Neutral of USD3.9 billion. 
Total capital invested in Macro strategies increased by USD11.6 billion in 4Q and USD25.4 billion for FY16, finishing the year at USD575 billion.

The HFRI Macro (Total) Index gained +1.3 per cent in 2016 despite posting positive performance through periods of market stress in January and June; Macro sub-strategy performance was led by Commodity and Active Trading sub-strategies. Macro experienced a narrow outflow of USD497 million for 4Q, including a large sub-strategy rotation in which investors allocated over USD6.0 billion of capital to quantitative, trend-following CTA strategies, while redeeming nearly the same amount (USD6.0 billion) from fundamental, discretionary strategies. For 2016, investors withdrew a total of USD9.7 billion from Macro strategies, with sub-strategy outflows led by USD16.3 billion of redemptions from Discretionary Thematic strategies, partially offset by inflows of USD6.6 billion into Systematic Diversified CTA strategies.

Outflows by firm size were distributed across capitalizations, with the withdrawals from the largest firms (>USD5 billion AUM) falling from the prior quarter, while withdrawals from USD1-5 billion AUM firms increased. Investors withdrew USD5.6 billion from firms managing greater than USD5 billion in 4Q, falling from USD21.8 billion in 3Q and totalling USD42.6 billion of outflows for 2016. Investors withdrew USD10.0 billion from firms managing between USD1-5 billion in 4Q, with withdrawals from these totalling USD25.1 billion for FY16. Investors withdrew USD3.1 from firms managing less than USD1 billion in 4Q, with outflows to these totalling USD2.4 billion for 2016.
 
“Hedge fund assets surpassed a historic milestone to conclude 2016, as the industry posted the strongest asset increase in two years through the political turmoil of Brexit and the US Presidential election,” says Kenneth J. Heinz, President of HFR (pictured). “Growth occurred against a backdrop of mixed withdrawals, as investors and institutions positioned for continued geopolitical and economic uncertainty in 2017, including the new policies of the Trump administration, progression toward Brexit implementations and uncertain European elections in Netherlands, France, Germany and Italy. With global equities near record highs and US interest rates beginning to rise, funds tactically positioned for this environment are likely to benefit from these developments and lead industry performance in 2017.”

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