New data from the Citco group of companies (Citco) which reveals that hedge funds continued their impressive run of performance in December, with an overall weighted average return of 2%.
Highlights:
- All strategies saw positive performance. Event Driven funds achieved the highest weighted average return of 3.5%, followed by Equities at 3.3% and Fixed Income Arbitrage at 2.4%.
- On an AUA basis, all categories posted positive returns. Funds with between $1B-$3B were the top performers, with a weighted average return of 2.7%.
- Hedge funds ended the year on a strong footing with 79.2% of funds achieving a positive return, up from November’s figure of 76.8%.
- Multi-Strategy funds were the main drivers of investor flows, with net outflows of $9.4B, while Hybrid strategies went against the overall trend with net inflows of $1.9B.
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Executive Summary
Performance
The final month of the year saw hedge funds continue their impressive run of performance, with all strategies seeing positive returns.
Funds administered by the Citco group of companies (Citco) delivered an overall weighted average return of 2% in December, with Event Driven, Equities and Fixed Income Arbitrage funds the top performers.
Event Driven funds achieved a weighted average return of 3.5%, followed by Equities at 3.3%, and Fixed Income Arbitrage at 2.4%.
Global Macro strategies were close behind with a weighted average return of 1.9%, while Multi-Strategy and Commodities funds rounded off the month with weighted average returns of 0.9% and 0.6% respectively.
On a fund size basis, all strategies had a second consecutive month of positive returns. Funds with between $1B-$3B of assets under administration (AUA) were the best performers, with a weighted average return of 2.7%.
Smaller funds with between $200M-$500M of AUA and less than $200M of AUA were next, at 2.4% and 2.2% respectively, while funds with between $500M-$1B of AUA came in at 1.8%. In a departure from the pattern seen throughout much of the year, the largest funds with more than $3B of AUA had the lowest weighted average return in December, at 1.7%.
The month also saw 79.2% of funds achieve a positive return in December, a slight increase on November’s figure of 76.8%, as hedge funds ended the year on a strong footing.
Meanwhile, the rate of return spread – the difference between the 90th and 10th percentile fund returns – dipped back to 8.1%, having jumped to 11.8% in November.
Capital Flows
Activity picked up sharply in the final month of the year as investors reassessed positions ahead of 2024.
In keeping with previous years, both inflows and outflows were elevated in December, with subscriptions more than doubling month-on-month to $15.7B, while redemptions also jumped to $36.2B, leading to net outflows of $20.5B.
Multi-Strategy funds were the main drivers of investor flows, with $7.1B of subscriptions countered by $16.5B of redemptions, to leave net outflows of $9.4B. Equities also saw elevated activity, with $3B of subscriptions and $10.5B of redemptions, to leave net outflows of $7.5B.
Fund of Funds and Global Macro strategies also saw heightened subscriptions and redemptions, leading to net outflows of $3.4B and $1.1B respectively overall, while the remaining strategies were more muted.
Hybrid strategies went against the overall trend after seeing net inflows for another month. The popularity of Hybrid funds has been well noted throughout the year, and in December they saw $3.3B of subscriptions which outstripped $1.4B of redemptions, leaving net inflows of $1.9B.
On an Assets under Administration (AUA) basis, the largest strategies stood out in terms of activity levels. Funds with more than $10B of AUA saw subscriptions of $9.5B and redemptions of $19.9B, to leave them with net outflows of $10.3B. Funds with AUA between $1B-$5B had net outflows of $4.2B, followed by funds with between $5B-$10B of AUA at $3.7B. The smallest funds with less than $1B of AUA had net outflows of $2.2B.
On a geographic basis, all three regions saw net outflows. Strategies based in the Americas were the focal point, with $9.7B of subscriptions countered by $25.2B of redemptions, to leave net outflows of $15.4B. Asia and Europe followed with $3.6B and $1.4B of net outflows respectively.
Current projections for the first quarter of 2024 are for net outflows of $8.6B although this is subject to change.
Alternatives Funds Risk “Missing Out” On Performance From Cash Drag
Alternatives funds could be missing out on a performance boost from cash positions if they are not making the most of multi-year high interest rates, says Ryan Fitzgerald, Head of Middle Office Solutions, Citco Fund Services (USA) Inc.
Cash management has become an increasingly important focus for managers – whether they run fledgling funds or multi-billion dollar strategies – since the start of last year as central banks like the US Federal Reserve raised rates to combat surging inflation.
The US Federal Open Market Committee (which sets interest rates), voted for 11 rate hikes between March 2022 and July 2023 as it sought to quell Consumer Price Index (CPI) inflation. It has taken the Federal Funds rate from near zero to today’s level of 5.25%-5.5%, a 22-year high. Whether more rises are on the way is unclear, but the Fed’s policy shift has altered the risk/reward profile of all asset classes, and made cash in particular far more attractive.
This has implications for all alternative investment managers, with a number of operational considerations to take into account in order to make the most of cash as a return-generating asset.
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Performance
Overview of Investor Flows
Insights into Trade Volumes
Going into the holiday period in December, we witnessed unprecedentedly high volumes in the days after the Federal Reserve’s guidance on interest rates on 13th December. While there was a dip in volumes overall versus the previous month, December’s total was well ahead of the same month last year, and Q4 was the busiest quarter Citco has seen in terms of volumes. December’s activity was largely driven by high-frequency trading strategies, with volatility remaining subdued throughout the month to set a new low for the year. Our trade ingestion STP rate was a healthy 97.1% in December.
Insights into Payments, Treasury and Collateral
Treasury payments set yet another fresh peak in December to close out a year which shattered previous records.
The total number of treasury payments from hedge funds administered by Citco went above 50,000 for the first time since Citco started reporting on the data, with a grand total of 50,732 for December. The figure was almost 10% above December 2022’s figure of 46,573 payments.
December has been the busiest month of the year for the previous three years as hedge fund managers focus on treasury management, hedging and cash management activities at year-end to prepare for the coming year.
