Hedge funds shrug off volatility with $30B in gains

Hedge funds have managed to weather the market's wild rides over the last two months, posting a performance related increase in capital of $29 billion.

The hedge fund industry experienced net outflows of $1.5 billion according to mid fourth quarter data from Hedge Fund Research (HFR), which covers October and November this year. But, thanks to performance-related gains, the industry's total assets to a record $2.85 trillion as of the end of November.

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The plunge in the oil price dominated markets last month, with West Texas Intermediate sinking 14 percent in the month, while Brent crude lost around 15 percent over the same period, with declines accelerating in December.

Volatility in the Russian ruble was also in focus, with the currency losing around 13 percent against the dollar last month ahead of the severe losses seen this week.

"After several years of strong equity beta gains, falling volatility and increasing investor risk tolerance, increased volatility originating from the energy and commodity sector has been a catalyst for increases in volatility across most asset classes, with sharp increases across emerging markets, currency and equities going into year end," said HFR president, Kenneth J. Heinz.

"While the speed and extremity of these moves may have surprised some investors, resulting in modest capital withdrawals, many hedge funds, particularly those in macro, quantitative and trend-following spaces, have been effectively positioned for this," he added.

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Despite recent gains, macro strategies were behind most of the outflows, which were offset in part by inflows into event-driven and relative value arbitrage strategies -- a tactic whereby a hedge fund manager purchases a security that is expected to go up in value while simultaneously selling short a related security that is expected to depreciate.

Mid-quarter outflows were concentrated in the industry's largest funds, with firms managing over $5 billion experiencing net outflows of $7.13 billion over the two-month period.

Firms managing between $1 billion and $5 billion experienced net inflows of $3.97 billion, while firms below $1 billion experienced inflows of $1.67 billion, according to HFR.

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