Investors In Prime Position After Best Start To A Year In Over A Decade

Hedge funds’ performance and asset flow are fiercely picking up. With the pandemic easing off, the industry has returned 3.7% in the second quarter of 2021, with a top-level year-to-year return of 8.8%: the best first half to a year since 2009.   

This is the conclusion of the HFM Global Composite Index, which analyzed performance, flows, and other metrics within the hedge fund industry. The document presents data as of mid-July and offers a very encouraging outlook given the volatility of the global economy at present. 

Strong Outlook

The impressive performance was mainly driven by an equity return of 4.9% and event-driven strategies delivering 4.7% in Q2 2021. Hedge fund products saw a $55 billion net flow, “taking the year-to-date total to $52 billion, comfortably ahead of 2020’s $23 billion outflow.”

During the same period, HFM reports the inception of 152 new launches, depicting an upward trend since the first half of 2020. Further, six out of 10 were long/short equity funds, with nine out of 10 set to debut within HFM’s Billion Dollar Club of companies amassing more than a billion in assets.

Also, on a very delightful note, 34% of investors are setting sights on increasing hedge fund allocation in the second half of this year, with 15% weighing to decrease. But even though 45% were planning to increase six months prior, “the outlook remains strong for hedge funds.”

According to the report, the returns of billion-dollar hedge fund managers outperformed those of smaller shops, reaching 3.9% versus 3.7%. This breaks an opposite trend in recent years.

Big Vs. Small

“In Q2, 80% of hedge funds had positive performance, new and potential hedge fund mandates accounted for 48% of investor mandates on the HFM database, and launches outpaced liquidations.”

With this outlook, investors are in a privileged position as fundraising opportunities are bound to increase, and have a better setting to bolster their conversations heading into the second half of 2021.

However, the role of oil prices has never been so affecting ever since the pandemic started. The price per barrel has skyrocketed from $30 in May 2020 to over $65 a year later, and crude oil futures have reached the highest level since October 2018.

The report states that “If oil price rises are not transitory but rather part of a new, post-pandemic economic reality, then allocators and hedge funds will need to factor this into all aspects of investment.”

In fact, hedge funds have already started moving in that direction. BlueCrest Capital Management hired metal trading talent last May, and later appointed ex-co-head of global oil trading at Bank of America, Charlie Susan, as a portfolio manager.

Likewise, Aura Capital has turned its focus to liquid markets, futures contracts with oil and natural gas in the U.S.

Commodities and Inflation

Commodities have become more significant for macro hedge funds in the last 18 months, says the report. 

In June, CPI in the U.S. reported a 5.4% year-on-year increase, smashing the 2008 record. Inflation the same month also represented a 0.4% jump from May and excluding fresh food prices and energy prices, it gained 0.9% compared to 0.7%.

Although the Federal Reserve has stated numerous times that inflation will be transitory and wane by the end of 2021, experts do not discard oil reaching 2014 price levels of $100 a barrel. 

For investors, states the HFM report, inflation means “more opportunities beyond mere -trend-following passive strategies.” 

“Certainly, hydro-carbon intensive businesses can expect diminished prospects from even light-touch ESG regulation.” This puts sustainability at the center of every investment endeavor and macro risk assessment. 

On the date of publication, Cristian Bustos did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to any publishing guidelines.

Cristian Bustos is senior editor for ValueWalk.com. Previously, he was the news correspondent in Germany for Colombian radio broadcast Blu Radio, where he covered the 2017 German federal election and the 2017 G20 Hamburg summit. He was also public relations consultant to EY and HAYS, and has covered a wide range of topics including business, finance, and international relations, as well as verticals such as automotive, aerospace, and renewable energy. Email him at cbustos@valuewalk.com.