Allocators have renewed their interest in hedge funds after the industry fell out of favor in recent years.
Institutional investors funneled $19.8 billion in new capital to hedge funds during the first quarter, the largest sum since 2015, according to data from Hedge Fund Research (HFR). The sharp rise in inflows came as asset owners looked to capitalize on a period of extreme market volatility, driven by Russia’s invasion of Ukraine, global inflationary pressures, and expectations for Federal Reserve interest rate hikes.
The investment rush also occurred during a quarter of strong performance for hedge funds. HFR’s HFRI 500 Index, a composite index of the largest 500 funds that report to the firm’s database, gained 0.3% in Q1, faring better than the tech-heavy Nasdaq and the S&P 500, which each recorded their worst quarterly performance in two years in the three months ending March 31. In 2021, hedge funds substantially trailed the S&P 500’s 26.9% return, gaining only 10.2% for the year.
Macro strategies, which attempt to profit from broad market swings related to large-scale economic and political events, led the increase in investor allocations on strong performance-based gains. This category of hedge funds lured in $40 billion of new capital in the first quarter to $677.8 billion in total assets under management.
“Macro hedge funds experienced a historic quarter, not only leading capital increases and posting record, negatively-correlated performance gains, but doing so through intense, extreme volatility across multiple asset classes driven by surging geopolitical risks and macroeconomic uncertainty,” HFR President Ken Heinz said in a statement.
Relative Value Arbitrage (RVA) strategies, hedge funds that take advantage of price differentials between related securities like stocks and bonds by simultaneously buying and selling them to potentially profit from the “relative value” of the two financial instruments, were also popular during the quarter . Allocations to these investment vehicles, which are influenced by changes in interest rates, jumped $14.9 billion in the first quarter, ending the period with $1,035 trillion in assets under management.
“RVA managers navigated not only a sharp increase in interest rates, but also a yield curve inversion, the highest inflation in 40 years, a sharp increase in sovereign default risk, an intra-quarter flight to quality reversal of interest rate increases, and expectations for additional rate increases in 2022,” HFR said in its report.
The hedge fund industry’s largest firms, those managing $5 billion or more, were again the most favored by investors. These heftier money managers drew in approximately $16.8 billion of net new capital last quarter, while firms with $1 billion to $5 billion in assets under management accumulated an estimated $2.3 billion in new capital inflows. Hedge funds managing less than $1 billion received about $723 million in net inflows over the quarter.
“Institutional investors are likely to continue increasing their commitment to combining effective, volatility-positive, capital preservation with managers offering opportunistic exposure to interest rate and inflation trends” Heinz said in a statement.
“Funds tactically positioned to navigate these multi-asset trends are likely to lead industry performance and growth through mid 2022,” he added.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
Read the latest financial and business news from Yahoo Finance
Follow Yahoo Finance on twitter, Instagram, YouTube, Facebook, flipboardand LinkedIn