In addition, the investible HFRI 500 Fund-Weighted Composite index has gained 2.2% year to date through the end of the second quarter, led by directional equity hedge and event-driven strategies. Both these strategies "navigated surging risks" in the first quarter, followed by the easing of banking and inflation risks in the second quarter. The strategies were also complemented by the recent surge in technology and AI exposures, the report said.
Equity hedge led all prominent strategies with respect to both capital inflows and performance-based asset gains in the second quarter, driven by fundamental value and technology strategies.
Total equity hedge capital climbed by an estimated $29.4 billion to finish the second quarter of 2023 at $1.14 trillion, as strong performance-based gains were complemented by an estimated $2.8 billion of new investor capital in the quarter.
Equity hedge sub-strategy asset increases were led by fundamental value funds, which jumped $16.5 billion in the second quarter on strong performance and net asset inflows of an estimated $2 billion.
The investible HFRI 500 Equity Hedge index gained 4.3% year-to-date through the second quarter of 2023 to lead all main strategy indices.
Event-driven strategies, which focus on out of favor, often heavily shorted, deep value equity and credit positions, saw an estimated asset increase of $17.4 billion in the second quarter, raising total event-driven capital to $1.07 trillion.
The investible HFRI 500 Event-Driven index has gained 2.2% year-to-date through the second quarter, led by the HFRI 500 ED: Activist index, which jumped 6.4%.
Moreover, after gaining 14.35% in calendar 2022, the investible HFRI 500 Macro index declined by 0.9% over the first six months of 2023, despite gaining 2.7% in the second quarter of 2023.
Overall, second quarter inflows were concentrated in the industry's largest firms, with those managing more than $5 billion witnessing an estimated net asset inflow of $6.5 billion.
Firms managing between $1 billion and $5 billion experienced an estimated net outflow of $366 million for the second quarter, while firms managing less than $1 billion saw estimated net outflow of $2.56 billion.
"Investors allocated new capital to hedge funds in the second quarter of 2023, extending gains from (the first quarter) despite a total reversal of investor risk tolerance from the risk-off dominated environment that concluded (the first quarter) to a strong risk-on sentiment, driving performance and attracting investor capital to end the first half of 2023," stated Kenneth J. Heinz, president of HFR, in the report.
Mr. Heinz also said that hedge funds have "navigated this powerful shift in risk tolerance and sentiment, including not only an AI-led surge in technology exposures, but also a sharp reversal in banking risk and a recent decline in inflation data, presenting a significantly different market paradigm and opportunity set across asset classes than had dominated the prior 18 months."