State Of The Hedge Fund Industry At Year-End 2021 (2024)

It's January, and that means a plethora of articles looking back on 2021 and forward on what to expect in 2022. With Intelligence released its review of hedge fund performance in 2021, reporting a 10.4% average gain among hedge funds, according to the HFM global composite.

For comparison, the hedge fund industry returned 13.1% in 2020. The industry's 2021 return provides a second consecutive year of double-digit gains for hedge funds — the first time this has happened in more than 10 years.

However, the S&P 500 returned 26.9% for the year, while the Dow Jones Industrial Average was up 18.7%, and the Nasdaq Composite returned 21.4%. The MSCI World Index was up 22.35% for 2021, while the MSCI ACWI gained 19.04%.

Two halves

The first half of 2021 offered most hedge fund managers profitability but fairly few alpha generation opportunities. The equity markets continued to rise throughout the first half of the year, especially driving equity and event-driven hedge funds' performance higher to result in an 8.8% return through June.

The second half of the year brought more challenges for traders, resulting in a broader array of returns among hedge funds. The fourth quarter brought sizable inflation risks to market trends as the omicron variant of COVID-19 weakened fund manager performance.

The firm describes November as "the flashpoint," when the emergence of omicron upset the market's bullish expectations about the economic recovery, resulting in sizable reversals in the market. November was the worst month for hedge fund performance since the pandemic began.

Fund performance by strategy

CTAs and managed futures funds faced significant adverse impacts from the macro environment with especially strong trend reversals and record daily losses on Black Friday. Event-driven hedge funds had the highest return in 2021 at 14.9%, while macro funds had the worst at 5.2%. Relative value and arbitrage funds and long/ short equity funds were in second and third places, respectively, in terms of performance.

Last year brought a significant reversal among hedge fund strategies as long/ short equity was the top-performing strategy of 2020 at 20.6%. It was followed by relative value/ arbitrage and multi-strategy funds, both with returns in the 14% range.

Hedge funds with at least $1 billion in assets under management posted returns that were right in line with the performance of their smaller counterparts, at 10.2% and 10.5%, respectively. In comparison, 2020 brought a significant difference in performance based on size, as smaller hedge funds returned 14.5%, while larger funds were up 9.5% for the year.

Macro effects

The ultra-tight U.S. labor market had a small impact on inflation concerns in the fourth quarter, but investors and fund managers felt greater effects from Europe's unseasonably cold weather. Europeans had record-high power and gas prices.

Although the firm believes the largest price spikes in Europe are in the past, market watchers are now focusing on the economic recovery in the U.S. and the Federal Reserve's approach to dealing with inflation. policymakers and fund managers alike want to avoid a repeat of the bond market volatility experienced toward the end of 2021, resulting in sizable losses for several leading global macro funds.

The global stock markets ended 2021 on a positive note, while digital assets dipped in value, reducing the luster of the extraordinary returns from some of the top crypto and best-performing multi-strategy and macro funds.

Major events in 2021

With Intelligence listed several significant events in 2021, starting with the short squeeze initiated by retail investors in GameStop and other heavily shorted names. In March, family office Archegos Capital collapsed due to the failure of several highly leveraged trades, resulting in more than $10 billion in losses.

Hedge funds marked their best first-half performance since 2009 in June with an 8.8% return. In October, volatility in the bond market overshadowed the beginning of the COP26 Conference and the launch of the first bitcoin futures exchange-traded fund in the U.S.

The omicron variant emerged in November, triggering a reversal of some key trends and resulting in some of the worst returns for CTA funds ever recorded.

Glowing investor flows in 2021

2021 was one of the best years for inflows from investors "in recent memory," marking a significant turnaround from the outflows recorded in 2020 and 2019. Hedge funds recorded more than $70 billion in inflows through November despite the $11 billion in outflows that month.

Combining the first 11 months with December's flows suggests the hedge fund industry has over $4 trillion in assets under management for the first time in history. 47% of all hedge funds and 56% of all funds with over $1 billion in assets had positive inflows last year.

Flows by strategy

Managed futures and multi-strategy hedge funds racked up the most inflows in 2021 at $19.2 billion and $22.2 billion, respectively. Macro funds and fixed income/ credit funds recorded outflows of $4.2 billion and $5.5 billion, respectively. Additionally, equity strategies got pounded in the fourth quarter as they lost more than $7 billion, bringing their 11-month inflows down to $13.1 billion.

It was a sign that many investors saw a market top around the corner and decided to slash their shorter-term long exposure. With Intelligence expects that the equity funds that do attract inflows this year "will likely straddle public and private equities."

The firm recorded a "small but meaningful uptick in the number of new hybrid hedge funds, such as biotech start-up Deep Track Capital, which launched with $800 million in the first half of last year. Hedge funds and particularly hybrid funds will become increasingly well-placed to attract inflows if private equity returns start to fall due to increased valuations caused by record inflows and about $1 trillion in dry powder.

Questions for 2022

An important question for this year in how the hedge fund industry categorizes and regulates these new hybrid funds. It explained that hybrid funds have innovative, flexible structures that "challenge existing ideas around hedge funds' relationship with

A sizable increase in the number of crypto products in development last year. It expects the number of new, high-quality crypto launches to increase as institutional interest rises. Additionally, the firm believes that crypto strategies and hybrid funds could define the hedge fund launch market in 2022.

With Intelligence also thinks 2022 could bring a standardized approach to analyzing ESG rankings, adding that it could be this year's "most significant development."