Part of an investment and risk management toolkit for wealth managers, private banks and family offices for some time, hedge funds' capital moved higher in the latest quarter.

The hedge fund industry held more than $4 trillion of assets at the end of September, and performance rose, highlighting how this sometimes-embattled sector has managed to push ahead in testing market conditions, figures show.

Assets rose for the fourth straight quarter in a row, with “event-driven” and “relative value arbitrage” strategies gaining fans, although investors cut allocations to the “equity hedge” area, figures from Hedge Fund Research said yesterday.

The sector’s fortunes have waxed and waned since before the 2008 financial crash. Sometimes, figures in the asset management sector, such as investment guru Warren Buffett, say these funds, which typically charge an annual fee and performance fee that is higher than for traditional funds, don’t justify the cost. On the other hand, they can profit from market swings and eke out gains during down markets, their defenders say. They remain an element of private banks’, family offices’ and wealth managers’ portfolios.

Event-driven strategies seek to profit from price movements from mergers, acquisitions, and other corporate events; relative value arbitrage strategies try to exploit mispricing in securities, and equity hedge strategies aim to offset risks of loss in stock markets.

Funds rose by almost $53 billion in the latest quarter. Investors allocated an estimated $2.3 billion in new capital to the hedge fund industry in 3Q23.

HFR said its investible HFRI Institutional Fund Weighted Composite Index has gained 4.0 per cent since the start of 2023 through the third quarter.

Event-driven (ED) strategies, which categorically focus on out of favor, often heavily shorted, deep value equity and credit positions, saw their assets rise by nearly $25 billion in the third quarter, taking total ED capital to $1.096 trillion. 

Capital managed by equity hedge strategies fell slightly, amid a more volatile stock market. Total EH capital fell by an estimated $5.1 billion to end 3Q23 reaching $1.13 trillion. 

Capital that is managed by credit and interest rate-sensitive fixed income-based relative value arbitrage strategies rose as interest rates continued to rise, increasing by an estimated $17.5 billion in the the quarter, raising total RV capital to $1.08 trillion. 

Following a small drop in the first half of this year, macro hedge fund strategies gained in performance, rising 1.4 per cent, HFR said. Total macro capital recovered from the early 2023 asset declines to increase by an estimated $15.5 billion in 3Q, bringing total macro strategy capital to $693 billion. Macro funds try to profit from broad market swings caused by political or economic events.

“Hedge funds have again navigated a powerful shift and negative reversal in risk tolerance and sentiment, as positive correlation between equities and bonds rose sharply throughout 3Q, presenting risks to classic, traditional long-biased strategies, as well as opportunities for funds tactically positioned for these trends,” Kenneth J Heinz, president of HFR, said.