In a quarter marked by bank crises on both sides of the Atlantic, and forces such as rising interest rates and geopolitical concerns, certain types of strategy fared well, while others lost ground.

Total global hedge fund capital rose to $3.88 trillion at the end of March, a quarterly increase of over $50 billion, as these entities gained during a volatile period amidst rising interest rates and geopolitical risks such as the continued Russian war with Ukraine, figures show.

Investors allocated an estimated $9.1 billion in new capital to the hedge fund industry in Q1, the first quarter of net asset inflows since the first quarter of 2022, according to Hedge Fund Research, the Chicago-headquartered firm tracking the space. 

The investable HFRI 500 Fund Weighted Composite Index gained by 0.52 per cent in 1Q23, led by directional equity hedge and event-driven strategies. These types of fund navigated a complex and dynamic environment of soaring bank risk, including the collapses of Silicon Valley Bank and Signature Bank, generalized weakness in regional banks, and the Swiss government-facilitated acquisition of Credit Suisse by UBS.

“Industry performance was driven by a volatile combination of evolving risks from 2022 as well as new unpredictable risks surging in 1Q23, with managers navigating dislocations in bank stocks and AT1 bonds, while also managing a significant reversal of expectations for interest rates in 2023,” Kenneth J Heinz, HFR president, said in a statement. 

Total equity hedge capital increased by an estimated $33 billion to end Q1 2023 at $1.11 trillion.

Event-driven strategies, which focus on unloved and often heavily shorted, deep value equity and credit positions, did well. They pulled in $18.4 billion of assets in the quarter, raising total capital to $1.054 trillion. 

These funds handled not only the surge in bank risk but volatile swings in interest rates as well as an extreme dislocation and repricing of AT1 bonds. (Holders of such bonds as issued by Credit Suisse have seen their assets wiped out.) Event-driven funds also target price moves before, during and after mergers, acquisitions and other corporate transactions.

Hedge fund capital managed by credit- and interest rate-sensitive fixed income-based relative value arbitrage strategies increased by $12.9 billion in Q1, raising total RV capital to $1.05 trillion. RVA managers navigated sharp increases in interest rates, a volatile flight to quality, and a significant reversal of expectations for the path of interest rate increases for 2023. 

After surging by 14.35 per cent in 2022, the HFRI 500 Macro Index fell 3.5 per cent in 1Q23, with negative contributions from quantitative, trend-following CTA strategies, as well as weakness in short fixed income positions, HFR said in its report. Total macro capital declined by $14.3 billion to end the quarter at $663.3 billion.