Hedge fund assets jumped to record levels in the first quarter of this year, when funds had their best first quarter in five years, according to the latest HFR Global Hedge Fund Industry Report, released on Thursday by Chicago-based research firm Hedge Fund Research.
Total investor capital allocated to hedge funds in the first quarter exceeded $16 billion, HFR said in a statement.
Combined with strong performance for hedge funds in the first quarter, when stock and credit markets gained strongly, total capital invested in the global hedge fund industry increased to $2.13 trillion, exceeding the previous record of $2.04 trillion set in mid-2011, HFR said.
Among investment strategies, those most favored by investors were fixed income-based Relative Value Arbitrage and Macro, which received "an overwhelming majority of the new investor capital for the quarter," HFR's statement said.
It said that in the first quarter, investors allocated $12.4 billion in net new capital to Relative Value Arbitrage and $7.8 billion to Macro and redeemed $2.9 billion from Equity Hedge and $940 million from Event Driven strategies.
Relative Value Arbitrage is an investment strategy which seeks to take advantage of price differentials between related financial instruments by buying and selling different securities simultaneously. Macro is a strategy based on macroeconomic trends. Equity Hedge involves taking long and short positions in separate stocks simultaneously. Event Driven investing is driven by specific events related to companies or countries.
In the first quarter, investors preference for the industry's most established managers continued to be pronounced, according to HFR. Firms with more than $5 billion in assets under management were allocated $18.3 billion in new capital in the quarter, while funds managing less than $5 billion saw a combined net outflow of nearly $2 billion over the same period.
"The record level of assets and the shifting distribution of these are indicative of powerful trends shaping the hedge fund industry in 2012," Kenneth J. Heinz, President of HFR, said in a statement.
"Sophisticated institutional investors are increasingly allocating to hedge funds as a powerful strategic portfolio complement to existing traditional holdings, utilizing transparency to balance equity market beta, access uncorrelated returns and enhance their ability to exceed target return requirements," Heinz added.