Opalesque Industry Update – During the first quarter of 2022, market trends generally reflected continued and exacerbated inflation risks which worked in concert with geopolitical events to significantly impact performance.
The HFM Global Composite is down -0.2% in Q1 against a 4.9% reversal for US large caps. Additionally, 60% of BDC’s hedge funds reported positive returns in the first quarter, which will bolster investor relations teams’ confidence and argument for the remainder of the first half of 2022.
The key moment of the first quarter was in late February when Russia invaded Ukraine, creating a generational geopolitical crisis and a vast humanitarian tragedy while displacing the pandemic as an event of seismic historical and economic consequences. Unsurprisingly, managed futures and macro funds were the main beneficiaries of the resulting market volatility, with the remarkable Haidar Jupiter Fund returning 148.7% in the first quarter of 2022.
Futures funds under management rose 7.8% in the first quarter, with a macro return of 3.0%, a sign of what investors can expect in the second quarter. The economic and political consequences of the invasion upset bullish expectations about the recovery and central bank policy and caused significant market reversals and dislocations. The secondary and collateral impact on national economies and businesses will be felt for years.
Fundraising remains positive
After adding $31 billion in 2021, the industry continued to attract net inflows in the first quarter of 2022. An estimated $11.2 billion poured into the industry, with macro earning $8.5 billion. dollars and managed futures attracting $4.3 billion. After a few difficult years, macro funds benefited from the price shocks and commodity instability caused by the war in Ukraine.
Stocks and event-driven stocks were hit hard in the first quarter, losing $10.8 billion, a sign that investors could see an approaching market top and a related slowdown in deal flow. At times like these, equity valuations may seem disconnected from other asset classes, not to mention global events, but long/short equity funds were down 3.5% in the first quarter and a new decline is expected in the second quarter. The US CPI hit 7.9% – its highest level in forty years – and fears of high inflation mean there is a threat that consumers will react to falling disposable income by cutting spending.
A key question is how insulated any US recovery is from the military and economic fallout from the Russia-Ukraine crisis. Early signs indicate that the economic health of households and businesses remains strong despite the undoubted disruption of supply chains and, based on current trends, it seems that the Ukraine crisis will not delay the Fed’s monetary tightening policy.
Launch momentum maintained
The hedge fund industry still has a compelling story to tell at the start of the second quarter of 2022 despite global market turbulence. European hedge fund activity accelerated in the second half of 2021 as the backlog of new funds began trading. On top of that, pent-up demand from investors who suspended research activity in 2020 and 2021, as well as high manager turnover, will ensure that new funds are as well positioned to capitalize as established companies.
The number of launches reached 86 during the first quarter of 2022. This continues a recovery in activity in 2021, where With has tracked at least six hedge fund startups raising assets of $1 billion or more in what was another short-term record for the industry. In comparison, 2020, 2019 and 2018 saw four, five and four billion dollar launches respectively. Other funds are expected to join the ranks of the billion-dollar club this year, including Alex Karnal’s $3.5 billion hybrid health fund, Braidwell.
A notable launch is former TCI partner Oscar Veldhuijzen’s new long/short equity hedge fund, OCAP Partners. Other notable startups include former Two Sigma CRO Senthil Sundaram’s Kula Investments.
