Hedge funds start to see inflows after big drawdowns in 2020

(Reuters) - Global investors have turned net buyers of hedge funds in recent months, data showed, attracted by their strong gains and the prospects of higher market volatility as countries recover unevenly from the pandemic.

Hedge funds have attracted cumulative net inflows worth $1.3 billion in the past three months, data from Refinitiv Lipper shows. These funds, whose complex strategies generally do better in volatile times, registered massive outflows of $25 billion in 2020. (Graphic: Monthly flows into hedge funds, )

The data shows hedge funds have delivered an average gain of 4.3% this year so far, after gaining 11.6% in the last quarter of 2020 - the biggest quarterly gain since 2009. (Graphic: Hedge funds' quarterly gains, )

“Since the first quarter of 2020 we have seen market volatility and dispersion rise,” said Chris Walvoord, U.S.-based global head of hedge fund portfolio management and research at investment consultant Aon. “This is generally good for relative-value hedge fund strategies that go both long and short and rely on the relative movement of prices.”

“We have also seen an increase in events, ranging from mergers to restructurings and even SPACs, that again provide opportunities for other types of hedge funds.”

Hestia Capital Partners LP led the gainers among 1,514 hedge funds tracked by Lipper, climbing 224% this year. Hestia has large holdings in GameStop, which soared at the start of the year thanks to a social media frenzy.

Arca Digital Assets Master Fund LP and Hashdex Digital Assets Index Fund, which invest extensively in cryptocurrencies, were also among the top gainers.

Investors had exited hedge funds in the past few years, disappointed by the lack of "alpha", which is the measure of a manager's skill in beating stock returns, and their higher fees and bigger downside risks. (Graphic: Hedge fund's performance vs MSCI World index, )

A steady equity rally since March last year, backed by government stimulus, also attracted investors.

Jim Smigiel, Pennsylvania-based chief investment officer of non-traditional strategies at investment management firm SEI, said hedge funds’ performance should not be compared to that of equity indices because of the diverse investment strategies they employ.

According to SEI’s own measure of hedge fund returns, based on exposure to market factors such as equity, credit and interest rates, 2020 was one of their best years in the recent past, he said.

Lipper data indicates that contrarian and "bottom-up" hedge fund strategies, aimed at the stocks deemed undervalued after the 2020 rally, have performed better. (Graphic: Price performance of hedge funds based on strategies, )

On the other hand, systematic-quant funds, which buy and sell securities according to mathematical formulas and computer models, lagged broader hedge fund returns. (Graphic: Hedge funds returns this year- by strategy, )

Smigiel said there were many examples of speculative excesses in areas such as SPACs, cryptocurrencies and “meme stocks” - driven by social media - where prices have diverged from fundamentals.

“While such periods of excess can persist for a while, prices eventually tend to implode, creating compelling opportunities for short sellers,” he said.

Reporting By Patturaja Murugaboopathy; Editing by Vidya Ranganathan and Kevin Liffey