Hedge fund AUM increases 14.2% on disruptions

Hedge fund managers took advantage of plentiful disruption in the wake of the COVID-19 pandemic to find investment opportunities across stocks, bonds, sectors and geographies, producing strong returns in the year ended June 30.

Returns of nearly every hedge fund strategy category were positive over the 12- month period, buoying worldwide assets under management in hedge funds to $1.31 trillion, data from Pensions & Investments' 12th annual hedge fund survey of 107 institutionally oriented hedge fund managers showed.

Assets managed by the 89 hedge fund firms that provided data for P&I's survey in 2021 and 2020 were up 14.2% to $1.25 trillion as of June 30.

In contrast, hedge fund assets under management worldwide for the prior year ended June 30, 2020, by the same managers were down 7.6%, according to P&I data from that year.

Industry sources concurred that 2021 was an exceptional year for hedge fund managers.

"The hedge fund industry had a strong year ended June 30, propelled by a massive tailwind from global growth that continues to accelerate," fueled by governmental fiscal stimulus across countries, said Victoria Vodolazschi, New York-based director investments and hedge fund research at Willis Towers Watson PLC.

The high degree of dispersion in stock prices globally in the year ended June 30 created good investment opportunities that hedge fund managers took advantage of, especially outside the U.S. in European and emerging markets, she said.

Event-driven hedge funds did well because of the high number of corporate actions during the year, as did merger arbitrage, macro and equity strategies, Ms. Vodolazschi said.

Returns were a significant contributor to the asset growth of many hedge fund managers as "huge dislocations drove hedge fund returns," said Kenneth J. Heinz, president of hedge fund data provider HFR Inc., Chicago.

The HFRI Fund Weighted Composite index returned 27.5% in the year ended June 30, compared with the -0.5% return of the index as of the same date in 2020, Mr. Heinz noted. For comparison, the S&P 500 index returned 40.8% for the year ended June 30 vs. 7.5% for the year ended June 30, 2020.

Global hedge fund industry assets reached a new aggregate peak of $3.96 trillion as of June 30, 2021, an increase of 24.5%, pushed higher by an estimated $34.4 billion of net inflows for the trailing four quarters ended June 30 as well as investment returns, Mr. Heinz said, citing HFR data.

The profitable environment for hedge funds resulted in 64.5% of the 107 managers in P&I's universe experiencing AUM growth in the year ended June 30, compared with 46.7% as of the same date in 2020.

On the flip side, P&I's data showed that 15.9% of managers surveyed reported lower AUM in 2021 compared with 32.7% the previous year and a little less than 4% of managers reported flat AUM compared with just under 2% the year earlier. About 16% of hedge fund firms in the P&I universe were new participants in the survey or comparative data for June 30, 2020, was not available vs. about 19% the year before.

Industry sources said conditions were conducive for high hedge fund alpha production during the year.

"Performance was very strong across the board in all hedge fund categories in the year ended June 30 and many hedge funds produced alpha above their beta targets. During this period, hedge fund manager alpha was at levels not seen since 2008," said Daniel Stern, a New York-based senior managing director of alternative investment consultant Cliffwater LLC.

"Alpha production by hedge fund managers is not surprising given disruptions that happened in many sectors" since June 30, 2020, Mr. Stern said. Hedge fund strategies that also did very well in the year ended June 30 included credit and convertible arbitrage, he added.

Among strategies that had lower positive returns included fixed-income arbitrage and equity-market neutral, he said.

Cliffwater anticipates that the "very high alpha" that hedge fund managers generated will continue given continued uncertainty regarding inflation, low interest rates and how countries deal with coronavirus variants, Mr. Stern said.

Some hedge fund managers in P&I's universe could not accept more investment in their hedge funds despite attractive investment conditions, due to capacity constraints. For example, New York-based BlackRock Inc.'s worldwide hedge fund AUM increased 19.3% to $23.1 billion in the year ended June 30, and could have been higher but the firm closed some of its hedge funds to new investment because of capacity constraints. The firm ranks 16th on P&I's list.

"A lot of our growth in the year ended June 30 was from investment gains, but we have seen strong demand from new investors," said Abigail G. Geller, managing director and co-head of global distribution and strategic initiatives for BlackRock's alternative investors unit.

Ms. Geller said she couldn't provide specifics on investor demand, but noted that "we watch capacity carefully and are more conservative than other hedge fund managers. We've had a lot of momentum going into 2021 from all client types as investors turn to hedge funds to diversify their portfolios. We could have raised a lot more in our hedge funds without capacity controls."

Among the hedge funds BlackRock has closed for new investment are equity long/short equity strategies, Ms. Geller said, adding that the firm has "extensive waiting lists" for these funds.

Demand for hedge funds from all investor types is driven by concerns over low fixed-income returns and inflation, Ms. Geller said, noting that BlackRock's hedge fund portfolio managers see "a huge wave of opportunities" for strategies including event-driven, merger arbitrage, credit and equity.

Given the broad range of global investment opportunities, there has been wide performance dispersion between hedge fund managers, sources said.

"We haven't seen a level of material dispersion between hedge fund managers in 10 years. There's a wide gap between the top quartile of managers and the rest. They are investing aggressively and paying low prices for them. These managers are looking over the crevasse and across countries toward recovery," said W. Brian Dana, managing principal, consultant and director of marketable securities at Meketa Investment Group Inc., Westwood, Mass.

"The level of dispersion was very enticing over the 12 months ended June 30. We're getting a lot of inbound inquiries from hedge fund managers trying to capitalize on a good year," Mr. Dana said.

The broad range of investment opportunities for hedge fund managers widened the span of AUM gains and losses among individual hedge funds in P&I's universe in the year ended June 30.

New York-based Senvest Management LLC, which runs a contrarian, value-based strategy, had the largest AUM gain among survey respondents of 230.2% to reach $3.7 billion as of June 30, moving the firm up to the 72nd position from 98th the prior year.

Systematic manager Winton Group Ltd, London, had the largest AUM decline — 39.1% — to $7.1 billion as of June 30. Winton moved to the 51st position in P&I's 2021 manager ranking from 33rd the prior year. Winton's AUM was down 46.6% in the year ended June 30, 2020.

Both firms declined to comment about their performance.

Analysis of hedge fund survey data showed that the concentration of hedge fund assets managed worldwide by the 25 largest managers — $865 billion or 65.8% of total assets — was essentially the same as the 65.7% proportion the prior year.

The $525 billion of worldwide assets of the 10 largest managers in the survey was 39.9% of total AUM as of June 30 compared to 36.4% as of the same date a year earlier.

The order of the ranking of the three largest hedge fund managers changed with the 17.1% decline in assets of quantitative systematic-trading specialist Renaissance Technologies LLC, New York, to $58 billion, moving the firm to third place in P&I's ranking from second.

Renaissance declined to comment on the drop in its AUM.

Bridgewater Associates LP, Westport, Conn., remained the largest manager in P&I's universe with assets up 6.9% to $105.7 billion as of June 30. London-based Man Group PLC replaced Renaissance in second place with AUM of $76.8 billion as of June 30, up 23.3% from the same date in the prior year. Man Group was the third-largest manager in P&I's 2020 survey.

AQR Capital Management LLC, Greenwich, Conn., reported its third consecutive year of AUM decline to $26.1 billion as of June 30, down 18.7% in the year, moving the firm down to No. 14 on P&I's ranking from 11th last year. The firm's AUM fell 47.2% to $32.1 billion in the 2020 survey, and fell 27.3% to $60.8 billion in 2019, historical P&I survey data showed.

"Hedge fund assets under management increased nearly 10% in the first half of the year to $26.1 billion, with strong performance from equity-market neutral, global value, corporate arbitrage and absolute return strategies," AQR said in an emailed statement.

Another change to the P&I's top 10 ranking is the absence of Elliott Investment Management LP, West Palm Beach, Fla., because the firm declined to report its assets managed worldwide in hedge funds. In 2020, Elliott reported total assets of $42 billion and ranked fifth in P&I's manager ranking.