Institutional Investors Were Tepid on Hedge Funds in 2022, Withdrawing $55.4 Billion

Posted on 01/20/2023

Sovereign investors, wealthy endowments, and pensions are a major source of capital for global hedge funds, according to SWFI research. HFR is a research firm tracking the global hedge fund industry. HFR calculated that institutional investors pulled out an estimated US$ 55.4 billion from hedge funds in 2022 versus an inflow of approximately US$ 15.1 billion in 2021. Institutional capital in global hedge funds amounted to US$ 3.83 trillion at the end of 2022, compared to US$ 4.01 trillion at the end of 2021. Some positive news for hedge funds is that the value of the funds grew US$ 44 billion in the fourth quarter of 2022, according to HFR. HFR revealed that “larger, more established” hedge funds outperformed smaller hedge funds in 2022. Furthermore, larger hedge funds, according to SWFI research are winning mandates with sovereign wealth funds and large public pensions. Larger hedge funds have more visibility when it comes to event marketing, media appearances, and marketing teams. The war for money and talent favors the deeper pockets to now surprise.

In 2022, hedge funds had to deal with a volatile year. “True” hedge funds likely did well, longing and shorting stocks, while buy, buy, buy hedge funds likely felt some pain, as current assets fell in value such as bonds and stocks. Investors had to deal with a rampant inflation, a quick turnaround in interest rates, a collapse of cryptocurrency markets, and a slowing global economy.

Size Matters
With respect to hedge fund flows, outflows for both the fourth quarter and 2022 were scattered across firms of all asset sizes, with the industry’s largest firms — those which managed more than US$ 5 billion — experienced an estimated net asset outflow of US$ 10.2 billion for the fourth quarter of 2022 and US$ 31.9 billion for 2022.

Hedge fund firms that manage between $1 billion and $5 billion witnessed an estimated net outflow of US$ 8.3 billion for the fourth quarter of 2022 and US$ 18.5 billion for all of 2022.

Firms managing less than US$ 1 billion saw investors redeeming approximately US$ 3.1 billion in the fourth quarter of 2022, bringing 2022’s total outflow to roughly US$ 5 billion.

Global Macro
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%. This is the highest outperformance margin since the index’s inception on January 1, 2005.

Hedge funds that invested in startups in 2019, 2020, 2021, and 2022 have generally fared worse in recent times. The technology rout has forced these hedge funds to mark down the value of their holdings in private companies. D1 Capital Partners, Tiger Global Management, Lone Pine Capital, Viking Global Investors, and Coatue Management, which raised money from large asset owners, reaped financial rewards in 2021 from a hot IPO market. These same investors are facing issues with their current holdings as IPO markets have stalled. Some of these private companies that have marked down their values include Caris Life, Stripe, Patreon, DataRobot, Impossible Foods, Algolia, Snyk, Pine Labs, ByteDance, SpaceX, and Databricks.

Hedge Fund-of-Funds
In 1990, estimates of US$ 1.9 billion was invested in hedge fund-of-funds across 80 products. By 2007, the number reached around 2,500 products totaling nearly US$ 800 billion. In 2022, the estimate is around US$ 688 billion in hedge fund-of-funds across around 1,000 plus products. For many small allocators such as endowments and pensions, hedge fund-of-funds continue to be a mainstay. However, the industry is facing margin compression in some instances. For emerging managers, around 70% of hedge fund-of-fund invest in emerging managers

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