Hedge fund capital inflows steady as volatility increases

• Total industry capital increases to 9th consecutive quarterly record;

• Systematic Diversified/CTA strategies lead performance, outflows in 3Q;

• Inflows spread from largest firms to small and mid-sized firms

Total hedge fund capital increased to a record level in the third quarter as financial market volatility increased into quarter-end, with inflows concentrated in Event Driven and Fixed Income-based Relative Value Arbitrage strategies, according to the latest HFR Global Hedge Fund Industry Report, released today by HFR®, the established global leader in the indexation, research and analysis of the global hedge fund industry. Hedge fund industry capital finished the quarter at $2.82 trillion, an increase of $18 billion, or 0.6 percent, over the prior quarter; through the first three quarters of 2014, hedge fund industry assets have increased by $190 billion, or seven percent. The 3Q increase marks the 9th consecutive quarterly record level of total hedge fund industry capital.

The increase in capital was primarily from new allocations as investors added $15.9 billion in new capital to hedge funds in 3Q, a decline from the $30.5 billion in inflows from 2Q14. Inflows YTD totaled $72.7 billion, the highest inflow for the first three quarters of a calendar year since 2007. Hedge fund performance was essentially flat for the quarter, with the HFRI Fund Weighted Composite Index® posting a decline of -0.09 percent (9 basis points); the index gained +3.07 percent through the first three quarters of 2014.

Third quarter inflows were concentrated in fixed income and credit-based strategies, including Relative Value Arbitrage (RVA) and Event-Driven (ED) strategies. Investors allocated $11.1 billion to fixed income-based RVA, bringing YTD capital inflows in RVA to $40.6 billion and total RVA capital to $756 billion. Within RVA sub-strategies, investors allocated $6.1 billion in new capital to Fixed Income Multi-Strategy funds, bringing YTD inflows for RVA: Multi-Strat to $25.5 billion and increasing total capital in this sub-strategy to nearly $450 billion, making it the largest single sub-strategy area of the total industry. Similarly, investors allocated $11.4 billion in new capital to Event-Driven (ED) strategies, bringing YTD inflows to $27.1 billion and total ED capital to $756 billion. ED inflows were concentrated in Special Situations sub-strategies, with these receiving $5.8 billion in new capital. The HFRI Relative Value Index posted a narrow gain of +0.13 percent to 3Q14, leading all strategies YTD with a gain of +4.94 percent through quarter-end. The HFRI Event Driven Index posted a decline of -1.48 percent for 3Q14, paring the YTD gain for ED to +2.81 percent.

Equity Hedge (EH) strategies received new inflows of $4.55 billion in 3Q, bringing YTD inflows to $25.8 billion and total EH capital to $778.4 billion, the largest strategy area by assets. EH inflows were concentrated in Fundamental Value strategies, with these receiving $2.7 billion for 3Q and $10.9 billion YTD. The HFRI Equity Hedge Index declined -1.3 percent in 3Q, also paring the YTD gain to +1.92 percent.

Despite an important performance reversal in Macro and CTA strategies, investors continued to withdraw capital from Macro in 3Q, with redemptions totaling $11.1 billion in 3Q and $20.7 billion YTD. Macro redemptions were concentrated in quantitative Systematic Diversified CTA strategies, with redemptions from these totaling $5.7 billion for 3Q and $11.5 billion YTD. The HFRI Macro Index posted a gain of +2.7 percent for 3Q and +3.8 percent YTD, while the HFRI Macro: Systematic Diversified/CTA Index gained +4.62 percent in 3Q and +4.81 percent YTD. Performance-based asset gains in 3Q offset outflows in Macro to increase total strategy capital by $7 billion to $528 billion.

Investors redeemed $2.1 billion from Fund of Hedge Funds (FOF) in 3Q, offsetting a small inflow in the prior quarter, bringing YTD FOF outflows to $1.96 billion and total FOF capital to $672 billion.

For the first time since 2009, inflows to both small and mid-sized firms exceeded the inflows to the largest firms in the hedge fund industry. Firms managing less than $1 billion received $5.1 billion in capital inflows, while mid-sized firms, managing between $1 and $5 billion, received $6.6 billion in inflows. The industry’s largest firms, managing greater than $5 billion, received inflows of $4.2 billion.

“Hedge fund capital growth continued through the third quarter, albeit at a slower pace than the second quarter, as total industry capital reached another record and year to date inflows totaled the highest in seven years,” stated Kenneth J. Heinz, President of HFR. “Global financial markets experienced a significant macroeconomic inflection point in the third quarter, driven by a combination of both expected and unexpected catalysts, contributing to strategy performance dispersion, increased trading activity, heightened asset volatility and strong capital inflows for the quarter. Investors anticipating and positioning for a continuation of these trends are likely to drive continued industry growth through year end and into early 2015.”