Asset owners significantly increased the pace of hedge fund investment in the first half of 2021 as they sought returns as well as diversification to protect portfolios from the potential of higher inflation, a rise in interest rates and higher volatility.
Analysis of Pensions & Investments' reporting of hedge fund activity found in the first half of 2021, hedge fund hires totaled $3 billion compared with $1.7 billion in the six months ended Dec. 31. Most of the investments went to single hedge funds.
Terminations fell in the first half of 2021 to $70 million vs. a total of $3.7 billion in the second half of 2020, which was highlighted by the $40 billion Connecticut Retirement Plans and Trust Funds, Hartford, terminating three hedge funds-of-funds managers totaling $2.4 billion.
Hedge fund inflows year-to-date May 31 totaled $39.1 billion with $12 billion coming in the month of May, data from eVestment LLC, Marietta, Ga., showed. In contrast, eVestment reported hedge fund industry outflows of $59.3 billion in all of 2020.
Money managers and investment consultants said the specter of potential macroeconomic changes ahead is pushing some institutional investors to seek safe havens, one of which is hedge funds.
"The No. 1 topic institutional investors want to talk about is inflation, but what they really are talking about is their bonds. All institutional investors will be impacted if inflation rises because those bonds will go down in price a lot," said Luke Ellis, CEO of Man Group PLC, London, in an interview.
"If the Fed raises rates, the front end of the yield curve pushes up, or if they don't raise rates, the bond market will sell off. Whether or not the Fed is directly responsible for interest rate increases, yields will be going up," and that is challenging for bond portfolios, he said.
The solution for a growing number of investors is to turn to hedge funds as a fixed-income substitute with a likely mix of low-net equity, credit and macro funds, Mr. Ellis said, noting that Man Group is seeing "very strong engagement with investors globally" regarding the use of hedge funds as a fixed-income substitute.
Man Group managed a total of $127 billion as of March 31.
Sources also said positive hedge fund performance in 2020 amid the COVID-19 pandemic likely persuaded more institutional investors to resume hedge fund investing in a variety of strategies in the second half of 2020 and to increase investment in the first six months of June 30. That's expected to continue for the remainder of this year.
Data provider Hedge Fund Research Inc., Chicago, reported that the HFRI Fund Weighted Composite index returned 10% year-to-date June 30, compared with 11.8% for the full year of 2020. In a quarter-to-quarter comparison, the HFR index returned 5.8% in the first three months of 2021 and 4% for the second quarter.