Capital invested in the global hedge fund industry surged to a record in the fourth quarter, finishing a strong year of capital growth as hedge funds posted the best performance in three years, according to the HFR Global Hedge Fund Industry Report.
Total capital increased in 4Q by US$120 billion on US$10.5 billion of net inflows to US$2.63 trillion, the sixth consecutive quarterly record, led by a surge in investor interest in Event Driven strategies, including Special Situations and Distressed/Restructuring funds.
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For the full year, total hedge fund capital increased by US$376 billion on US$63.7 billion of net inflows, as the HFRI Fund Weighted Composite Index posted a gain of +9.2%, the best calendar year performance since 2010.
Event Driven funds led capital inflows across all strategies for the first time since 2007, with investors allocating US$29.5 billion in 2013. Event Driven strategies grew by US$140 billion to more than US$698 billion for 2013, surpassing Relative Value Arbitrage as the second largest strategy area of hedge fund capital.
Inflows into Event Driven strategies for the year were led by Special Situations (US$15.4 billion), Distressed/Restructuring (US$6.7 billion) and Activist (US$5.2 billion) sub-strategies. The HFRI Event Driven Index gained +12.5% for 2013, the best performance since 2009.
Capital invested in Equity Hedge strategies increased by US$48 billion in 4Q, driven by investor inflows of US$8.6 billion, with total capital invested in the strategy reaching a record US$734 billion, the industry’s largest strategy concentration of investor capital; total assets invested in Equity Hedge increased US$136 billion for 2013.
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By GlobalDataInvestor inflows of US$17.9 billion were led by Multi-Strategy (US$15.1 billion) and Fundamental Growth (US$8.4 billion), while Fundamental Value, the largest EH sub-strategy by capital, experienced an outflow of US$10 billion for the year. The HFRI Equity Hedge Index gained +14.4% for 2013, also the best performance since 2009.
Total assets invested in fixed income-based Relative Value Arbitrage (RVA) increased by US$18 billion to US$684 billion in 4Q on US$2 billion of investor inflows. For the FY 2013, RVA increased by US$75.8 billion on inflows of US$22.6 billion, led by inflows into Multi-Strategy (US$14.8 billion), FI: Corporate (US$3.7 billion) and FI: Asset Backed (US$3.6 billion). HFRI Relative Value Arbitrage Index gained +7% in 2013, the fifth consecutive annual gain.
Macro funds experienced an outflow of US$13.3 billion in 4Q led by outflows from Systematic Diversified/CTA strategies of US$4.9 billion. The HFRI Macro: Systematic Diversified/CTA Index declined -0.7% for 2013, the third consecutive annual decline.
Fourth quarter outflows offset allocations from prior quarters, resulting in a FY 2013 net redemption of US$6.3 billion from Macro funds. For the FY 2013, Macro assets increased by US$23.7 billion to US$511 billion as larger firms posted relative performance-based asset increases despite the equal-weighted HFRI Macro Index narrowly declining by -0.2%, also the third consecutive annual decline.
The concentration of capital inflows to the industry’s largest firms moderated slightly in 4Q, as investors allocated to firms across the market capitalization spectrum. Investors allocated US$5.0 billion to firms with greater than US$5 billion in AUM, while allocating US$5.3 billion to firms with between US$1 and US$5 billion.
For the FY 2013, investors allocated US$40 billion to firms with greater than US$5 billion, US$16.6 billion to firms with between US$1 billion and US$5 billion in AUM, and US$7.2 billion to firms with less than US$1 billion in AUM.
By management firm location, 71.6% of 2013 capital inflows were allocated to firms located in the Americas region, with European-located funds receiving 22.3% while Asian-located funds received 5.8 percent of 2013 inflows.
Kenneth Heinz, president of HFR, said: "The powerful increase in investor risk tolerance drove strong capital flows into hedge funds as both institutional and retail investors positioned for greater intra-market equity dispersion across equity portfolios, and an extension of the dynamic M&A and Activist environment that dominated 2013. Hedge fund industry growth has continued to a record level of assets despite the challenges presented by a transitional regulatory environment, strong gains in traditional equities, and uncertain macroeconomic and political environments in 2013. With the US Federal Reserve beginning the process of tapering stimulus measures and economic pressures receding across the EU, the combined normalization of interest rates, equity market valuations and investor risk tolerance is likely to contribute to a conducive environment for actively managed, long-short investing as investors hedge 2013 beta-driven gains in favor of differentiated, uncorrelated alpha in coming years."
