Hedge funds' performance can wax and wane, and their fees have come down from the 2 per cent management fee/20 per cent incentive fee more than a decade ago. However, their ability to deliver returns in different market conditions means that they continue to figure in the wealth management mix.

Hedge fund capital rose to a record of $4.3 trillion milestone in the first quarter of 2024, buoyed by performance gains and investor inflows, according to industry figures from Chicago-headquartered Hedge Fund Research.

The total AuM figure rose $190 billion from the end of 2023.

A breakdown of the data shows that cryptocurrency-related strategies blew the lights out in the quarter, rising by 47.9 per cent in Q1, bringing the trailing six-month return to 106.9 per cent. The price of bitcoin has surged by 140 per cent – in dollar terms – in the 12 months to April 23.

Figures show how, despite periods when hedge funds have lagged long-only portfolios of stocks, their ability to earn returns in different market environments remains a reason why wealth managers keep them in their toolkits. (Hedge funds’ fees and performance have been criticized, as in the case of this attack by renowned investor Warren Buffett.) 

To put overall results in context, in the first quarter of 2024 the S&P 500 Index of US equities, by comparison, rose around 10 per cent from the end of December 2023. Hedge funds typically charge more than conventional long-only funds. According to HFR in September last year, fees declined. The average incentive fee was 16.01 per cent at end-September; the average management fee was 1.22 per cent.

Capital growth
Capital growth was boosted in part because investors raised exposure to directional equity hedge, event-driven and uncorrelated macro strategies, HFR said. 

The HFRI Fund Weighted Composite Index® rose by 4.5 per cent in the quarter.

Larger funds produced higher relative performance, with the HFRI Asset Weighted Composite gaining 5.12 per cent for the quarter. 

Strategies 
Capital managed by equity hedge strategies rose by nearly $70 billion at the start of 2024, rising to a record level of $1.25 trillion, driven by performance-based gains, as well as estimated net asset inflows of $8.5 billion, the organization said. (Hedged equity involves buying equity in some form, as an underlying investment, and then securing a hedge to potentially offset losses connected to market risk.)

Event-driven strategies, which focus on out-of-favor, often heavily shorted, deep value equity and credit positions, drew in assets of nearly $49 billion in Q1, raising total ED capital to a record $1.21 trillion. The HFRI Event-Driven (Total) Index gained 2.5 per cent in Q1.

Uncorrelated macro strategies posted its second-strongest quarterly performance since 2003, with the HFRI Macro (Total) Index rising 6.2 per cent in the quarter. (The manager will take a view on significant economic or political events and use derivatives on equities, bonds, currencies and commodities to try to profit from that view.)