Institutional investors pulled out an estimated $26 billion from hedge funds in the third quarter of 2022, according to a report from HFR, the research firm tracking the global hedge fund industry.
The withdrawal was attributed by HFR to "the volatility and positioning for generational inflation and increased likelihood of an economic recession," according to a Thursday news release.
The industry capital of the total global hedge fund industry fell to $3.78 trillion in the third quarter. That's down from $3.82 trillion in the second quarter, according to an HFR news release from July 26.
In the third quarter, HFR noted in the release, hedge fund managers navigated "extreme volatility" with leadership coming from "uncorrelated macro strategies, including fundamental commodity and discretionary funds, as well as quantitative, trend-following CTA (commodity trading adviser) strategies," which posted "record gains" through the third quarter. The gains came as "financial market volatility associated with generational inflation, sharply increasing interest rates, increased likelihood of a global recession, and geopolitical risks spiked to record levels."
The HFRI 500 Macro index jumped 17.2% year-to-date through the third quarter, the release added, beating the decline in U.S. equities by almost 5,000 basis points — the highest outperformance since inception of the index. A spokesman for HFR said by email that the index began Jan. 1, 2005.
Meanwhile, the HFRI 500 Fund Weighted Composite Index sank 4.5% year-to-date through the third quarter. "Negatively correlated macro gains offset weakness in directional and higher beta strategies," HFR noted in the release, "with both macro and the overall composite indices exhibiting the highest outperformance versus equity market declines in the first three quarters of a year since inception."
In addition, HFR said in the release that "larger, more established" hedge funds outperformed smaller hedge funds in both the month of September and year-to-date through September.
The HFRI Asset Weighted Composite index – which comprises the same constituents as the equal-weighted version – climbed by 0.5% in the month of September and gained 3.3% year-to-date through the third quarter.
Moreover, the investible HFRI 500 Fund Weighted Composite index declined by 1.9% in September and fell 4.5% year-to-date, as "gains in macro, currency, and CTA strategies were offset by declines in directional and higher beta strategies."
Also, the HFRI Fund Weighted Composite index has declined by 6.67% year-to-date through September.
The investible HFRI 500 Macro index jumped by 17.2% year-to-date through the third quarter, with contributions from the HFRI 500 FOF: Risk Mitigation (S) index, which gained 9.2% percent, the HFRI 500 Macro: Systematic Diversified index, which climbed 22.5%, and the HFRI 500 Macro: Commodity index, which surged a record 43.9% year-to-date, leading all strategies and sub-strategies.
With respect to flows, HFR said in the release, the hedge fund industry's largest firms — those managing at least $5 billion — led investor outflows in the third quarter, with an estimated net asset outflow of $18.9 billion for the quarter. Those firms managing between $1 billion and $5 billion witnessed an estimated net outflow of $5.3 billion. Investors redeemed almost $1.8 billion from firms managing less than $1 billion in the third quarter, HFR added in the release.
"Diversifying strategies such as macro, CTA and relative value arbitrage have demonstrated the robustness and effectiveness of their strategies to institutional investors throughout 2022, effectively navigating extreme volatility, generational inflation, sharp interest rate increases, a historic breakdown in correlations, an increased likelihood of a recession, and sharp increase in geopolitical risk," stated Kenneth J. Heinz, president of HFR, in the release.
"Once again, macro and relative value arbitrage hedge funds drove historic defensive capital preservation and the largest opportunistic equity and fixed income outperformance since inception of the HFR indices," Mr. Heinz said.
The "uncertainty regarding all these macroeconomic and geopolitical drivers," Mr. Heinz said in the release, has continued to accelerate into the fourth quarter with "expectations for extreme volatility and the potential for dislocations extending through year end."
Strategies which have "demonstrated their ability to navigate the current extreme market volatility," are "likely to attract capital from leading global financial institutions looking to stabilize their portfolios from losses in long equity and fixed income exposures, and to drive industry capital growth into 2023," he said.
