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Hedge funds had a strong start to the year, but it seems investors aren’t very confident in long/ short equity funds. Data from HFM Insights reveals that the HFM Composite Index was up 5.9% for the first quarter, bringing its 12-month gain to more than 30%. It marks one of the strongest 12-month periods for the composite on record.
Overall, the hedge fund industry had strong inflows, but long/ short equity funds had outflows in March.
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Over 70% of the funds reporting to HFM by mid-April were in the green for the first quarter, led by equity funds’ 8.1% return and event-driven funds’ 8% return. The firm said larger event-driven managers like Dan Loeb’s Third Point had an especially strong first quarter as they were well-positioned to benefit from the accelerated timetables for corporate reorganization, mergers and debt acquisitions.
HFM added that investors have paid attention to hedge funds’ strong first quarter and rewarded them. Net inflows for February amounted to $6.5 billion, and a significant portion of that went to event-driven funds. Between January and February, net flows soared past $10 billion. HFM said due to the significant uptick in investor searches, it was likely that flows in March and the second quarter would be positive as well.
According to HFM, hedge fund flows were positive in both January and February at $6.5 billion and $7 billion, respectively, continuing the positive trajectory that started in the second half of 2020. During the first quarter, the driver of these inflows was investors looking for macro funds at the beginning of the year and event-driven funds in February.
Those trends marked a reversal from last year when investors withdrawing money from North American event-driven and macro funds drove the global net outflow of $40 billion. As of the end of February, the global hedge fund industry ad $3.8 trillion in assets under management, another high-water mark. HFM believes that positive investor sentiment and the favorable trading environment mean the industry will soon reach $4 trillion in assets under management.
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Although all strategies had strong performances in the first quarter, March brought net outflows of nearly $10 billion for long/ short equity funds, the second-highest net outflow for long/ short equity funds in the last 12 months. Across the hedge fund industry, total outflows were almost $20 billion for the first three months of the year.
HFM said the recent reversal for long/ short equity funds suggests investors changed tactics as the COVID-19 vaccination efforts continued and economies looked to a consumer-led recovery from the pandemic. Additionally, the reversal in flows came despite strong performance numbers for most hedge fund strategies.
Senvest Partners led hedge funds in the first quarter as it benefitted from the volatility in GameStop and other heavily shorted names in January. HFM believes that due to the volatility in the markets, the scale of government intervention and the ongoing threat from COVID, only “consistent, sizeable outperformance will reassure capital allocators.”
Macro funds have benefited from shifting investor sentiment and the potential for price dislocations. However, HFM Insights believe investors could return to long/ short equity funds due to the ongoing threat of COVID variants and additional waves of infections. Long/ short equity could help investors protect their capital and reassure partners.
The firm also believes that the growing net outflows despite the positive performance suggest investors are increasingly bracing for a correction in the stock market and seeking other strategies to carry them through. The second-quarter numbers could be quite revealing when they become available, based on the reversal we saw in March.
