Hedge fund assets edge to record $5.64tn

Global hedge fund assets edged up to a record $5.64tn in the third quarter, as investors continued allocating capital through a period of rising interest rates and volatility in technology stocks, according to data from HFR. Net inflows of $34.5bn more than offset performance-based losses of $27.4bn, extending the industry's run of asset growth to 16 consecutive quarters. The modest gain contrasts with the second quarter, when assets surged by a record $409.3bn. Total industry capital has risen by $480bn so far this year, including $124.1bn of net investor allocations.

HFR president Kenneth J. Heinz said the quarter was dominated by sharp interest rate increases and volatility in tech and AI stocks, while managers continued to navigate geopolitical uncertainty linked to the Iran conflict. Heinz said investors continued to allocate to strong performing funds that had effectively navigated the shifting geopolitical and financial environment.

Performance diverged, with larger managers again outperforming smaller peers. The HFRI Asset Weighted Composite Index gained 1.2% in the quarter, while the HFRI Fund Weighted Composite Index fell 0.6%. Macro strategies led returns, with the HFRI Macro (Total) Index rising 4.3%; the HFRI Macro Systematic Diversified/CTA Index returned 5.7%, bringing its year-to-date gain to 15.7%. Equity hedge funds bore the brunt of the tech sell-off, with the HFRI Equity Hedge (Total) Index down 2.1%, including declines of 4.3% in fundamental growth and 3.3% in technology strategies. Event-driven funds fell 1.9% as tech volatility dampened IPO expectations, and relative value slipped 0.5% as rates rose.

By asset size, macro assets rose $40bn to $897.4bn, relative value grew $19.2bn to $1.45tn, and multi-strategy funds reached a record $900bn after adding $19.8bn. Equity hedge assets fell $31.6bn to $1.72tn and event-driven assets dropped $20.5bn to $1.57tn, despite inflows of $6bn and $4.9bn respectively.

Flows favored the largest managers. Firms running more than $5bn took in $36.6bn of net inflows in the quarter, while mid-sized managers with $1bn to $5bn saw net outflows of $2.3bn and firms below $1bn gathered $190m. Year to date, managers above $5bn have attracted $113.7bn of net inflows, compared with $8bn for mid-sized firms and $2.4bn for smaller managers. Heinz said hedge funds are positioned for a wide range of possible policy outcomes ahead of the US midterm elections, with significant implications for financial markets.