gorodenkoff
By 2022, the hedge fund industry experienced the largest outflow of net assets in six years, as investors steered clear of active managers amid exceptionally volatile and depreciating markets.
The capital flight of $55.4B was the largest from the $70.1 billion mark in 2016, according to a recent report by Hedge Fund Research, which collected data between 1991 and 2022. Going further back, though, net outflows hit a record $154.5 billion in 2008, during the heyday of the Great Recession, before declining somewhat to $131.2 billion in 2009.
Net asset flows were remarkably positive in 2021 ($15.12 billion), a year in which a number of memes quipped “stocks only go up.” In fact, the S&P 500 Index (SP500) skyrocketed 30% that year, only to be followed by the worst stock market crash of 2022 since the Great Recession. Volatility wreaked havoc on the hedge fund industry last year, as investor confidence took a hit from many central banks aggressively raising interest rates to curb inflation, as well as rising recession fears, the Russian invasion of Ukraine and other geopolitical tensions.
The report noted that “equity hedging” was among the worst-performing hedge fund strategies during the year, losing $112.5 billion as market participants pulled $40.4 billion out of funds that buy and sell stocks. By contrast, funds that try to profit from wide market swings stemming from macroeconomic events fared the best, earning $55.5 billion, though investors still pulled out $15 billion. “Event-driven” was the only type of strategy, which focuses on deep value and credit positions, that brought in money from investors, some $4.3B.
Overall, the size of the global hedge fund industry expanded to $3.83 billion, a quarterly increase of $44 billion, HFR said.
“Strategies that have demonstrated their ability to weather today’s extreme market volatility are likely to attract capital,” said HFR President Kenneth J. Heinz.
And with 2023 underway, the uncertainty surrounding last year’s macro and geopolitical drivers “accelerated in 1H23 with increased focus on the impact of higher interest rates, generational inflation, and expectations of global economic weakness.” Heinz added. “Leading funds continue to position themselves for a fluid trading environment and accelerating cycles of volatility, with further potential for disruptive dislocations across all asset classes.”
While investors largely avoided putting money into active management last year, one measure of hedge fund performance indicated that they performed significantly better than the stock market (SP500). The PivotalPath Hedge Fund Composite Index lost just 0.8% in 2022 against the S&P 500 twenty% drop and Nasdaq (COMP.IND) narrowly 3. 4% immersion. Pivotal Path tracks more than 2,500 institutionally relevant hedge funds, encompassing more than $2.5T of industry assets.
Mott Capital Management, a contributor to Seeking Alpha, argued last week that “it’s premature to say a new bull market is here” as the Federal Reserve’s battle against inflation continues. On the other side of the fence, he sees why Carlyle Group co-founder David Rubenstein thinks now is a good time to invest.
