Institutional investors pulled out an estimated $55.4 billion from hedge funds in 2022, compared to an inflow of about $15.1 billion in 2021.
Institutional capital in global hedge funds amounted to $3.83 trillion at the end of 2022, compared to $4.01 trillion at the end of 2021. The value of the funds increased $44 billion in the fourth quarter, according to a Friday report from HFR, the research firm tracking the global hedge fund industry.
HFR stated that hedge fund managers had to navigate through a "volatile" year that featured a "complicated dynamic of macroeconomic and geopolitical risks driven by generational inflation, sharp increases in interest rates, falling equity markets, a weakening global economy, an uncertain trajectory of pandemic/quarantine impacts and the collapse of the cryptocurrency market."
The HFRI 500 index declined 3.37% in 2022, but showed a gain of 1.6% in the fourth quarter, with leadership coming from "uncorrelated macro strategies, including fundamental commodity, discretionary, as well as quantitative, trend-following CTA (commodity trading advisor) strategies," the release noted.
Moreover, the HFRI 500 index outperformed equity and fixed income markets, which suffered sharp declines in 2022, and also outperformed technology stocks by nearly 30%, the widest margin since inception on Jan. 1, 2005.
Meanwhile, the HFRI Fund-Weighted Composite index declined 4.2% in 2022, but rose 2.26% in the fourth quarter.
HFR also noted that "larger, more established" hedge funds outperformed smaller hedge funds in 2022, as the HFRI Asset-Weighted Composite index — which comprises the same constituents as the equal-weighted version — climbed 0.9% in 2022.
In addition, the HFRI 500 Macro index jumped 14.2% in 2022, with contributions from a "wide range of macro sub-strategies, including commodity, currency, discretionary, fundamental discretionary thematic and quantitative, trend-following CTA strategies," the release indicated. This index outperformed technology equities by more than 47% — again, the highest outperformance margin since the index's inception on Jan. 1, 2005.
With respect to flows, outflows for both the fourth quarter and 2022 were distributed across firms of all asset sizes, with the industry's largest firms — those which managed more than $5 billion — witnessed an estimated net asset outflow of $10.2 billion for the fourth quarter and $31.9 billion for 2022.
Firms that manage between $1 billion and $5 billion witnessed an estimated net outflow of $8.3 billion for the fourth quarter and $18.5 billion for all of 2022.
Firms managing less than $1 billion saw investors redeeming nearly $3.1 billion in the fourth quarter, bringing the calendar year's total outflow to about $5 billion.
"For 2022, diversifying strategies such as macro, CTA and relative value arbitrage delivered inversely correlated performance gains, which is precisely the reason and rationale used by institutions for allocating to such strategies," stated Kenneth J. Heinz, president of HFR, in the release. "Driven by these gains and other areas of equity and fixed income risk-reducing strategies, the HFRI 500 Macro Index, as well as the Composite of all strategies industry-wide, delivered the widest outperformance of technology equity market declines since the inception of HFR Indices."
Mr. Heinz added that "uncertainty regarding all of these macroeconomic and geopolitical drivers has accelerated into (the first half of 2023) with increased focus on the impact of higher interest rates, generational inflation and expectations for global economic weakening."
Funds continue to position for a "fluid trading environment and accelerated cycles of volatility, with increased potential for destabilizing dislocations across all asset types," Mr. Heinz noted. "Once again, strategies which have demonstrated their ability to navigate the current extreme market volatility are likely to attract capital from leading global financial institutions seeking to stabilize their portfolios from losses in long equity and fixed income exposures, and to drive industry capital growth through (the first half of 2023)."