Hedge Funds Need a Solid Second Half To Deliver Industry Asset Growth

Industry trade magazine Hedge Fund Alert runs an annual survey in which it asks respondents to predict whether total hedge fund industry assets will rise or fall in the following calendar year. 

Yours truly ‘won’ last year. I thought that the global economy was overbought at the end of 2021, and so I felt that a pull-back in 2022 seemed likely. 

For 2023, I predicted an increase of 7.8%. And it looks like I’m going to need the hedge fund industry to deliver a stellar second half of the year. According to eVestment’s latest data, investors removed $11.57bn from hedge funds in April alone, bringing year to date net outflows to -$15.84bn. Long/short equity strategies bore the brunt of the redemptions, seeing -$5.85bn leave their funds in April. 

What’s not clear is the extent to which investors are pulling out of equities specifically. In recent years, there has been a big shift in investor appetite towards multi-strat funds, of which most – maybe all – trade equities to some extent. Indeed, these products have been an asset raising success story in the past three years, with eVestment estimating that the category now manages $665bn of assets, good for second place in the primary category list, behind perennial favorite long short equity at $697bn. If current trends continue, multi-strat will be number 1 before year’s end. 

At EFSI, we still see plenty of equity hedge strategies launching, more so than any other traditional primary category. That’s partly because launching a multi-strat hedge fund simply costs a lot more – you’ve got multiple portfolio managers to pay, even more data to manage, and more risk controls in place. These firms are large firms, managing large funds, and are another example of the continued trend of most of the inflows into the space going to the larger firms. 

But the equity strategies that are launching are doing so into an environment where we’re seeing public equities rising. The S&P 500 was, at the beginning of the year, around 3,800 and now it’s around 4,300; apparently, rising interest rates are seemingly not deterring risk asset investors. And we’re not seeing any funds struggle to launch. Part of that is for sure down to the apparent uptick in seeding deals – law firm Seward & Kissel’s annual seed study report suggests that long-short equity strategies contributed significantly to overall seeding activity. And part of it is likely due to many investors being unconvinced that cheaper, beta exposure to public equities is the best idea right now. 

When I look at the latest hedge fund performance data from HFR, there’s lots of green in the top-line indices, but only just. And if the outflows data is correct, and if it persists, then the equity managers are going to need to deliver a stellar H2 to grow overall industry assets. So, I’m rooting for the equity managers. I’m going to need them to do well if I’m to win Hedge Fund Alert’s outlook survey for the second year in a row!