Hedge funds attract the largest approach in 7 years based on market volatility

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, USA, on December 3, 2021.

Brendan McDermid | Reuters

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The hedge fund industry attracted its biggest inflows in seven years during the first quarter as investors sought downside protection amid a rise in volatility triggered by fears of inflation and rising interest rates as well as geopolitical tensions.

The $ 4 trillion community experienced a total capital inflow of $ 19.8 billion during the first three months of 2022, the highest quarterly inflow since the second quarter of 2015, according to hedge fund data firm HFR.

The great interest in hedge funds came when the bull market was threatened by the Federal Reserve’s aggressive tightening, Russia’s invasion of Ukraine as well as shocking 40 years of high inflation. The S&P 500 received a correction and lost 5% in the first quarter, marking its worst quarterly results since the start of the pandemic in early 2020.

Hedge fund managers took advantage of the notch in risk assets in the first quarter, posting a narrow gain of 0.3% overall, according to HFR. Macro Strategy, including Commodity Trading Advisor and Systemic Funds, was a prominent winner with a return of 9.1% during the period, its best performance in the first quarter since 1993, HFR said.

“We believe that the current investment environment – higher interest rates, higher inflation and higher volatility – speaks for hedge funds as an effective diversification to reduce overall portfolio volatility,” said Mark Haefele, UBS Global Wealth Management’s chief investment officer.

Citadel’s multistrategy flagship fund Wellington rose 4.7% in the first quarter, with all five of its underlying strategies – equities, credit, interest rates and macro, commodities and quantitative – positive for the period, according to a person familiar with returns.

David Einhorn’s Greenlight Capital achieved a 4.4% increase in the first quarter, driven in part by short positions and index hedging, the manager said in an investor letter received by CNBC.

In mid-January, Greenlight added more index hedges and increased its macro positions in corporate credit default while directing its research efforts to focus on short-term ideas, Einhorn said.

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