After a robust 2021, the first quarter brought a significant pullback in hedge fund performance. However, the first quarter was also marked by a sizable divergence according to strategy. The best-performing strategy returned 12.09%, while the weakest strategy was down 6.76%.
The first quarter was a highly volatile one that favored very few assets, which is why there was such a significant dispersion in returns based on strategy. Geopolitical events, particularly the war in Ukraine, soaring inflation and macro uncertainty drove persistent market volatility during the quarter.
Skyrocketing commodity prices drove soaring returns for hedge funds investing in commodities, while the broad-based uncertainties favored event-driven and macro hedge fund strategies.
Hedge fund performance by strategy
Hedge funds administered by Citco generated a weighted average return of -3.23% and a median return of -0.83%. Equities plunged during the first quarter, so it’s not surprising that hedge funds utilizing equities strategies did the worst, returning -6.76% on a weighted average basis with a median return of -2.75%.
The widespread weakness in the equity markets resulted in bear markets for the S&P 500 and the Nasdaq, hammering long-biased hedge funds and resulting in an even larger decline of 14.8%. Long/ short equity hedge funds did a bit better but were still in the red with a -5.4% return.
Multi-strategy and fixed-income arbitrage funds were also in the red at -2.14% and -1.28%, respectively. At the opposite end of the spectrum, commodities hedge funds led the way with a return of 12.09%, followed by event-driven funds at 9.16%.
According to Citco’s Declan Quilligan, all size categories generated negative returns for the first quarter, but the largest funds recorded the biggest declines. Citco-administered funds with over $3 billion assets under administration declined 3.71% on a weighted average basis. Funds between $1 billion and $3 billion in size generated a return of -3.25%, while those with $500 million to $1 billion returned -3.37%.
Quilligan observed outliers in almost all hedge fund categories, which resulted in significant differences between median and weighted-average performances. He added that poorer performance by larger funds in various size categories added to the divergence.
About 40% of the hedge funds administered by Citco were in the green for the first quarter, compared to about 61% in the fourth quarter. The dispersion in returns between the top 90th percentile of hedge funds and the bottom 10th percentile stood at 25.71% for the first quarter, compared to 17.3% in the fourth quarter and 12.49% in the third quarter.
The largest dispersion among the hedge fund strategies tracked by Citco was seen in event-driven funds, which recorded a weighted average return of 9.16% and a median return of -0.24%. Another significant area of dispersion based on strategy came in commodities, which had a weighted average return of 12.09% and a median return of 2.83%.
The dispersion among commodities hedge funds was particularly interesting in light of the robust performance of most commodities during the first quarter, which would typically have brought similar returns among hedge funds.
Hedge funds administered by Citco continued the trend of net inflows from 2021 when investor inflows outweighed outflows in every quarter. For the first quarter, hedge funds enjoyed inflows of $52.5 billion and redemptions of $38.9 billion, resulting in net inflows of $13.6 billion. The first-quarter inflows ended up being more than twice the net inflows recorded in the fourth quarter.
Citco-administered funds generally saw positive net inflows in intra-quarter months last year but usually some net outflows in the last month of each quarter. He observed this same trend in the first quarter as January and February recorded positive net inflows while March saw outflows slightly offset inflows.
Funds with less than $1 billion in assets under administration recorded net inflows of $200 million, while those with $1 billion to $5 billion recorded $2.6 billion in net inflows. Hedge funds with $5 billion to $10 billion in assets attracted $4.5 billion in net inflows, while those with more than $10 billion drew in $6.2 billion during the first quarter.
Citco also observed a continuation of the popularity of hybrid capital funds during the first quarter. The category attracted $8.2 billion in net inflows during the quarter, making it the most popular strategy by far. Multi-strategy funds came in second place with $4.7 billion in net inflows. The rest of the strategies had either minor net inflows or redemptions.
Based on region, hedge funds focused on the Americas gained $7.3 billion in the first quarter, followed by Europe with net inflows of $4.4 billion and inflows of $1.9 billion for Asia-focused hedge funds. According to Citco, $13.5 billion is scheduled to flow out of hedge funds in the second quarter, with an additional $6.3 billion in outflows slated for later in the year.
Trade volumes among hedge funds
Citco-administered hedge funds continued to break records in Treasuries, boosting volumes to yet another peak during the first quarter. The funds set a monthly record high in March, ending the first quarter at 102,701, a little higher than the fourth-quarter volume.
Trade volumes also continued to surge throughout the first quarter as volatility spiked, recording a sudden jump in the VIX.
Michelle Jones contributed to this report.