In 2022, hedge funds struggled mightily amid macro factors like the war in Ukraine, the jarring return of persistent inflation, and the ensuing trend of rapidly rising interest rates around the globe. In many cases, most or even all asset classes plunged in step with each other, leaving fund managers with virtually nowhere to hide their investors' capital.
The risk/ return profiles of virtually all major asset classes were altered, requiring managers to adjust their playbook. Those who could do so quickly outperformed managers who were set in their ways. In some cases, smaller funds were nimbler than their larger counterparts, which enabled them to adapt quickly.
According to HFR, total global hedge fund capital ended 2022 at $3.83 trillion, a quarterly increase of $44 billion.
Overall hedge fund returns
Hedge funds administered by the Citco group of companies recorded a weighted-average return of -7.02% for all of 2022. The median return of -2.86% demonstrates that smaller funds generally outperformed larger ones.
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More broadly, the HFRI 500 Index ended 2022 with a return of -3.37% after a fourth-quarter gain of 1.6%. The firm reported that globally, the leading hedge fund strategies were macro, including the sub-strategies of fundamental commodity, discretionary, and quantitative, trend-following CTA strategies.
The HFRI 500 Index broadly outperformed the equity and fixed-income markets and especially technology stocks — by 3,000 basis points, the widest margin since the index's inception. The HFRI Weighted Composite Index returned 2.26% in the fourth quarter, trimming its full-year decline to 4.2%.
Unlike Citco's report, HFRI reported that larger, more established hedge funds outperformed smaller ones in 2022, as evidenced by the 0.9% return for the HFRI Asset-Weighted Composite Index. As stated earlier, Citco's 2022 report indicated that smaller hedge funds often outperformed their larger peers due to a much smaller median loss versus the weighted-average loss.
The soaring volatility and rising interest rates took bites out of hedge fund returns in 2022, but most funds protected investor capital from the worst of the market's drubbings. 2022 was much more challenging for hedge funds than 2021 when funds generated a weighted-average return of 11.37% for the entire year.
Returns by strategy
There was a wide range of returns across hedge fund strategies, only two of which recorded positive performances in 2022. Commodities hedge funds were the standouts for the year overall, with a weighted-average return of 20.43% for Citco-administered funds and a 41.3% return for the HFRI 500 Macro: Commodity Index.
The median return of 12.33% for commodities funds was also the best of all major strategies and indicated that larger funds outperformed smaller ones. The only other hedge fund strategy in the green for 2022 was global macro, with a weighted-average return of 16.75% and a median return of 10.5% for funds administered by Citco.
On a global scale, the HFRI 500 Macro Index soared 14.2% in 2022 on the back of contributions from several sub-strategies, including commodities, currencies, discretionary, fundamental discretionary thematic, and trend-following CTA strategies.
The macro index outperformed technology stocks by over 4,700 basis points, also the highest margin since the index's inception. Performance-based declines paired with net outflows in the fourth quarter resulted in total macro capital plunging $34 billion, ending 2022 at $677.6 billion for macro funds globally. However, for all of 2022, assets managed by macro funds rose $40 billion.
However, event-driven funds managed to eke out a positive median return of 3.81% despite being the worst strategy of all, with a weighted-average return of -18.64%. The significantly higher median return indicates that smaller event-driven funds smashed their larger counterparts.
The second-worst strategy was equities, with a weighted-average return of -11.19% and a median return of -6.44%. Multi-strategy funds were among the most popular based on investor flows. However, their weighted-average and median returns of -7.47% and 1.59%, respectively, were surely to blame for the sizable redemptions that balanced against the significant gross inflows recorded at different times in 2022.
Performance by size
The carnage in 2022 was spread across hedge funds of all sizes. Although the largest funds were the best performers in 2021, they were the worst performers in 2022. Funds with over $3 billion in assets under administration generated a weighted-average return of -8.55%, although their median return of 3.94% was the best of all the size categories.
The underperformance in larger funds was a critical factor in the size-related returns, just as it was among event-driven funds. After funds with over $3 billion in assets, the second-worst-performing size group included funds with $200 million to $500 million in assets, which returned -6.31% on a weighted-average basis. Their -0.62% median return again shows that larger funds significantly underperformed smaller ones.
The trend was also evident in funds with $1 billion to $3 billion in assets, which generated a weighted-average return of -5.61% and a median return of -0.04%.
Citco also reported a vast dispersion in hedge fund performance overall, as demonstrated by the 51.55% return spread between the top 10% and bottom 10% of performers.
Investor flows by strategy
Despite 2022's vexing market conditions, investor flows into hedge funds administered by Citco held up relatively well, with a net outflow of only $11.5 billion. The year started out positive, with a robust first-quarter net inflow of $14 billion. However, gross redemptions more than offset gross subscriptions in the other three quarters, tipping investor flows into the red for the full year.
In 2021, Citco-administered hedge funds recorded robust net inflows of $37.3 billion. However, 2022's more challenging macroeconomic backdrop, marked by a major conflict in Europe, skyrocketing inflation, and steadily rising interest rates, weighted heavily on investor sentiment, triggering a dramatic shift in investor flows.
Even though investors abandoned ship on many strategies in 2022, some continued to enjoy net inflows for the year. For example, hybrid funds retained their position as the most-popular hedge fund strategy for another consecutive year, racking up impressive net inflows of $20.7 billion in 2022 after sizable subscriptions in the first and fourth quarters.
Despite their lackluster performance, multi-strategy funds managed a positive net inflow for 2022 on the back of a strong first-quarter net redemption of nearly $5 billion. Multi-strategy funds ended the year with net inflows of $2.8 billion.
Hedge funds utilizing equities-related strategies recorded $23.7 billion in net outflows, making them the least-favored strategy in 2022. In second place were funds of funds with net outflows of $5.8 billion.
Investor flows by size
Despite their dismal performance relative to that of their smaller peers, the largest funds with over $10 billion in assets recorded the smallest outflows in 2022, with net redemptions of $1.2 billion for the whole year. On the other hand, the smallest funds with less than $1 billion in assets recorded the largest net outflows for 2022, at $4.1 billion.
Geographically, Europe was the only region to record net inflows for all of 2022, at $4.5 billion. Americas- and Asia-based funds recorded net outflows of $10.2 billion and $5.8 billion, respectively.
Looking more broadly, HFRI reported that fourth-quarter and full-year outflows were spread across all size groups. While Citco's data indicated that larger funds saw the smallest outflows, HFRI found the opposite result and reported much larger net outflows when surveying globally.
Funds with more than $5 billion in assets under management saw a net outflow of $10.2 billion for the fourth quarter, bringing their full-year net outflow to $31.9 billion for 2022. Funds with $1 billion to $5 billion saw fourth-quarter net outflows of $8.3 billion, capping their full-year net outflows at $18.5 billion.
The report notes that funds with less than $1 billion in assets recorded almost $3.1 billion in net outflows for the fourth quarter and full-year net outflows of $5 billion for 2022.
