Hedge funds face fifth consecutive month of decline

Hedge funds largely protected investors from the equity market turmoil in August, posting flat returns of 0.02% during a volatile month that saw the S&P 500 decline 4.2%. Despite the relative outperformance, hedge fund industry AuM declined for the fifth consecutive month in August, falling $18.5bn, which extended the YTD decline to $146bn. North America accounted for the lion’s share of AuM decline as the region recorded net outflows of $10.1bn, driven by rising risk-off sentiment as inflation has remained rapid at 8.3% in August despite the Federal Reserve’s aggressive tightening. By strategy, long/short equity hedge funds posted the largest AuM decline of $11.8bn, resuming their trend of AuM decline that has persisted since the start of 2022 after a short-lived $0.9bn rebound in July.

The onset of the pandemic in early 2020 had a severe socio-economic impact on Latin America, with GDP declining by 6.8% in 2020 as governments implemented social distancing and other mitigation measures to reduce the spread of the virus. AuM of Latin American hedge funds were severely impacted, falling by $8.6bn in Q1 2020 as riskaverse investors sought to preserve their capital. Governments in the region reacted swiftly, targeting fiscal policy action to protect the most vulnerable groups and working in tandem with central banks to ease monetary conditions to support economic activity. Investor sentiment recovered, benefitting the Latin American hedge fund industry that rebounded strongly from its March 2020 low ($54bn), reaching a peak of $63bn in August 2021. Going into 2022, riskoff sentiment in the region grew as high food and energy prices related to the Russia- Ukraine war stoked political tensions and compelled global and regional central banks to raise interest rates to combat inflation. As of the end of July 2022, Latin American hedge fund industry AuM has declined $8.0bn from its August 2021 peak and currently stands at $55bn.

• Hedge fund industry AuM declined by $18.5bn in August, the fifth consecutive month of decline. The industry recorded $8.0bn of performance-based losses and $10.5bn of net outflows. YTD industry AuM decline increased to $146bn in August, driven by $45bn of performance- based decline and $101bn of net outflows.
• Hedge funds have experienced $101bn in net outflows YTD, with 68% of funds having net outflows. Most hedge fund strategies have struggled to attract net inflows in 2022 amid the challenging market environment. Arbitrage/relative value has fared best YTD, with 45% of funds managing to attract net inflows, whereas only 29% of fixed income hedge funds attracted net inflows in the same period.
• In terms of strategic mandates, fixed income ($1.4bn) posted the largest inflows in August, breaking a 10-month streak of outflows amid the rising interest rate environment. By contrast, CTA/managed futures funds suffered their second consecutive month of net outflows in August of $6.4bn, marking a sharp turnaround from the first six months of 2022. Fixed income and long/short equity have posted the steepest outflows of $45.3bn and $27.3bn respectively YTD as consecutive rounds of interest rate hikes by the Federal Reserve prompted investors to shift their investments away from these strategies.
• North America accounted for most outflows ($10.1bn) as investor risk aversion grew after the Federal Reserve reiterated its commitment to tightening monetary policy until inflation returns to 2% — even at the risk of triggering a recession. Europe has posted the largest YTD net outflows of $61bn as the ongoing Russia-Ukraine conflict has caused generational inflation in the region, hitting 9.1% in August.
• Funds in North America (42%) were most likely to have had inflows YTD as investors favor the region’s relative economic stability amid heightened macroeconomic uncertainty. The Federal Reserve continues to hike interest rates in a bid to bring inflation down to 2%.
• As of the end of July 2022, Latin American hedge fund industry AuM has declined $8.0bn from its August 2021 peak and currently stands at $55.1bn. Since December 1999, the Eurekahedge Latin American Hedge Fund Index has generated an annualized return of 12.4%, outperforming the Eurekahedge Hedge Fund Index (8.3%) and the Brazil IBOVESPA (8.3%).