It could just be that the hedge fund industry has turned a corner and bid farewell to the politically charged market volatility of the last few years. “2013 was an exciting year of growth for the hedge fund industry,” said Kenneth Heinz, President of Hedge Fund Research at a press briefing in London. “In Q4, net inflows totaled USD10.5billion, while total capital increased by USD120billion; the sixth consecutive quarterly record of assets.
Net inflows for the year were nearly USD64billion bringing total hedge fund industry capital to an estimated USD2.63trillion.” For comparison, net inflows into the industry in 2012 were USD34.4billion. Total hedge fund capital increased in 2013 by USD376billion. The HFRI Fund Weighted Composite Index posted a gain of 9.2 per cent, the best calendar year performance since 2010. A Barclays investor survey (Waiting to Exhale) released on 17 January 2014 suggests that 2014 could be even stronger than last year.
It estimates that USD80billion in net inflows could make 2014 the best year since 2007. Factor in an estimated USD285billion in reallocations and there could be USD365billion of assets ‘in play’ according to Barclays. Central to last year’s surge in inflows, said Heinz, were significant inflows into event driven and equity strategies. Event driven strategies attracted USD29.5billion in net inflows and grew by USD140billion to finish the year in excess of USD698billion, in doing so surpassing Relative Value Arbitrage as the second largest strategy tracked by HFR. Of those event driven inflows, Special Situations attracted the majority of assets (USD15.4billion), followed by Distressed/Restructuring (USD6.7billion) and Activist (USD5.2billion) sub-strategies. The HFRI Event Driven Index finished the year with gains of 12.5 per cent; its best performance since 2009. “The biggest theme evident in 2013 was shareholder activism.
There were exciting developments coming out of a number of different shareholder activist events, Herbalife being one of the more prominent,” said Heinz. As investor risk aversion fell last year it appeared to embolden activists to approach underperforming companies. “In a lot of respects, shareholder activism can almost be thought of as the antithesis of merger arbitrage. In merger arbitrage, companies are doing well and different people compete to acquire them. Shareholder activism is the opposite where something needs to be done to improve shareholder confidence; the focus is on taking on companies that are not worthy of mergers.
“Activists are great for investors. They are a threat only to managers who aren’t doing a good enough job of generating shareholder return on capital. Activism was an exciting trend in 2013 and we expect that to continue in 2014,” added Heinz. Equity Hedge strategies attracted USD8.6billion in investor inflows in Q4 while total capital invested increased by USD48billion. Throughout the year they increased by USD136billion, boosting total assets in Equity Hedge to a record USD734billion; the largest strategy by AuM. Other important themes that Heinz touched upon included: A reduction in average management fees among fund launches: these averaged 1.38 per cent through Q3 2013, compared to 1.62 per cent for calendar year 2012. In Q4, net inflows were greater in funds with between USD1billion and USD5billion in AuM – approximately USD5.3billion – compared to funds with greater than USD5billion in AuM, which received USD5.0billion in net inflows. Regarding the second bullet point, Heinz observed: “It’s not a huge difference but it is significant in that it shows investor risk is increasing. As allocators think about their strategy allocations they are starting to consider smaller managers and take a risk on the potential performance opportunities.”
Another interesting trend that Heinz picked up on, which could well continue to gain momentum in 2014, is the demand for liquid alternatives, also known as alternative mutual funds. More and more US managers – both hedge funds and traditional managers – are launching 40 Act Funds, which are similar to UCITS in Europe, and Heinz sees this as an exciting area of growth for the industry. “There is an estimated USD250-300billion in US 40 Act alternative mutual funds. The reason they are important is that they are widening out the base of investors to retail investors. They are being offered by traditional asset managers (not just hedge fund managers) like Franklin Templeton, Fidelity, and they’ll continue to grow. I don’t, however, think these products will compete with traditional hedge funds because you can’t do everything in a mutual fund that you can in a private hedge fund structure. Nevertheless, it’s an interesting trend to watch,” stated Heinz.