Hedge fund assets have surged this year, even as investors pulled money from the industry for a fourth straight quarter.
That’s because the 5.7 percent gain posted by fund managers during the first three months of this year was the best quarterly performance since 2006, according to a Hedge Fund Research statement Wednesday. The industry’s global assets rose about $79 billion in the first quarter to $3.18 trillion at the end of March — not far from the record $3.24 trillion reached at the end of September.
Hedge funds have rebounded from a turbulent fourth quarter in which they had their worst quarterly performance in more than a decade, according to alternative-assets data provider Preqin. While they have lagged the rally in stocks this year, many hedge fund managers are buckling up for more market volatility.
“The stance for many managers is to maintain the course when it comes to reducing long exposure, particularly given that so many geopolitical economic catalysts persist,” Preqin said in a report released Wednesday.
Hedge fund managers face many challenges this year, including “market bumps” and retaining investor capital, according to the firm’s report. The industry saw $17.8 billion of outflows during the first three months of this year, for a fourth straight quarter of redemptions, HFR data show.
Still, as hedge fund performance rebounded this year, HFR said the resulting surge in assets was the industry’s biggest since the first quarter of 2015.
Hedge funds focused on equity strategies had the best performance in the first quarter, with a 7.2 percent gain that was similar to the performance of large U.S. stocks, according to Preqin. But when considering hedge fund gains across strategies, the industry trailed the stock market in the first quarter, and its performance was worse over long stretches of time.
For example, hedge funds produced an annualized return of about 5.2 percent in the two years through March, trailing the 10.4 percent gain posted by the Standard & Poor’s 500 index, the Preqin report shows.
Macro and relative value were the worst performing top-level hedge fund strategies in the first quarter, returning about 2 percent each, according to the data tracker. Global political and economic concerns — including a trade war between the U.S. and China and struggling growth in Europe — likely have made macro fund managers reticent to launch new funds, Preqin said.
Investors redeemed a net $6.5 billion from macro hedge funds in the first quarter, compared with $12.3 billion outflows for all of last year, according to HFR. The biggest outflows in the first quarter were from equity hedge strategies, with investors withdrawing a net $10.7 billion despite their strong performance.
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Large hedge fund firms, or those managing more than $5 billion of assets, had the biggest outflows in the first quarter, according to HFR, though they slowed to about $5 billion, from $15.2 billion during the fourth quarter.
The world’s largest hedge fund firm, Bridgewater Associates, had $163 billion of assets at the end of last year, according to the Preqin report. AQR Capital Management is the second-biggest manager, with $100 billion of assets at the end of December, followed by Man Group with about $77 billion of hedge fund assets under management.
This year, hedge funds investors are eyeing a wide range of strategies to defensively position their portfolios against expected volatility in markets, according to Preqin.
“Investors are not looking to put as much fresh capital into hedge funds as we saw in the early parts of this decade,” Preqin said in the report. “We continue to see high levels of activity among the institutional investors we speak to as they become increasingly bearish and redeem and replace funds in their portfolios.”