The volume of total hedge fund assets in the market has reached a record in the first quarter of 2024 with $4.3 trillion, according to a new report from Chicago-based research firm HFR. The sum represents an increase of $190 billion from the fourth quarter of 2023 and was driven by both strong gains and net asset inflows. This marked the sixth consecutive quarter of asset increases for the asset class.
According to Kenneth J. Heinz, president of HFR, investors’ desire for access to specialized opportunities coupled with concerns about capital protection will likely continue incentivizing people to invest in hedge funds over the next decade.
London-based research firm Preqin predicts between now and 2028, hedge fund assets will likely grow at 3.5% a year to $5.2 trillion globally. According to Preqin, the asset class delivered an annualized return of 8% for 2023. Investment strategies focused on relative value, macro trends and niche sectors (such as cryptocurrency) delivered the best performance during that time.
According to Heinz, HFR recorded strong performance across the board in the first quarter of 2024, though hedge funds focused on uncorrelated macro strategies continued to lead. While uncorrelated macro strategies tend to be favored in less risky environments, expectations for lower inflation and coming interest rate cuts led to more optimistic investor behavior in late 2023 and the first quarter of 2024, Heinz noted. There has since been a dampening of that outlook as signs emerged in early April that inflation was not abating as much as the Fed previously hoped.
“Clearly, there’s been an inflection point in early April,” Heinz noted. “Inflation is not getting stronger, but people were expecting lower [numbers], and so because of that, you’ve seen both equities and bonds sell off under a less optimistic rate-cutting scenario they had priced in for the latter half of 2024.”
HFRI’s Fund Weighted Composite Index rose by 4.52% in the first quarter, while its Asset Weighted Composite Index rose by 5.12%. The Fund Weighted Composite Index increase was more modest than the 8.12% gain it posted for the full year 2023.
The HFRI Macro Index, which tracks hedge funds pursuing uncorrelated macro strategies, posted an increase of 6.2%, marking its best performance since the first quarter of 2022. Under that strategy umbrella, the HFRI Macro: Systematic Diversified Index delivered the best performance, with an increase of 9.39% in the first quarter.
In addition, the HFRI Equity Hedge Index rose by 5.17% during the quarter, with a particularly strong performance by the Healthcare Index (up 9.79%) and the Quantitative Directional Index (up 9.11%).
The HFRI Fund of Funds Composite Index also registered a gain of 4.17% during the period. The firm’s FOF: Strategic Index was the strongest performer in that category, with an increase of 5.25%, followed by its FOF: Diversified Index, with a rise of 4.08%. The HFRI FOF: Market Defensive Index delivered a gain of 3.62%, and the HFRI FOF: Conservative Index delivered a gain of 2.17%.
According to HFI data, there were 990 fund-of-funds in the market as of the first quarter.