Hedge fund returns were largely positive in December with the HFRI Fund Weighted Composite Index gaining 10.3% in 2021, according to data provider HFR.
Managers navigated the dual challenges of increasing interest rates and inflations on top of the impact of ongoing global coronavirus pandemic. Last month, hedge funds were up on average 1.3%.
“Led by high-beta strategies of equity hedge, event driven and commodities, hedge funds concluded with strong performance in December, capping a robust two-year period and successfully navigating extreme volatility and market cycle dislocations since the inception of the coronavirus pandemic and global quarantine as the total hedge fund industry surpassed $4 trillion in capital,” said Kenneth Heinz, president of HFR in a statement.
The $4 trillion milestone happened in the second half of 2021, and was significant when considering that the industry AUM fell just below the $3 trillion mark in April 2020. And while the gains of just over 10% trailed the 11%-plus gains in 2020, the top-decile performers saw strong performance in 2021.
Leading the way were funds invested in cryptocurrency, with the HFR Cryptocurrency Index surging 215%, topping the 2020 return of 193%.
For the full year 2021, the top decile funds of the HFRI index soared by an average of 45.6%, while the bottom decile declined by an average of 12.3%.
Equity Hedge funds, which invest long and short across specialized sub-strategies, led industry strategy gains in December and reversed the prior month’s decline, as global equities traded in wide intra-month range but recovered from an intra-month decline driven by fears of the spreading of the Omicron coronavirus variant.
“Since and inclusive of the historic equity market collapse from the outbreak of the global pandemic, equity-focused hedge fund strategies have significantly outperformed U.S. equities (as represented by the DJIA) by over 200 basis points and have done so with one-third less volatility,” added Heinz.
Event-driven strategies, however, outperformed equity hedge funds that were up over 11% in 2021. The HFRI Event-Driven (Total) Index was up 13.1%, which was that index’s highest performance since 2009. Activist and special situations funds saw strong gains in December, according to HFR.
Going forward, Heinz said that hedge fund managers are positioned for continued volatility due to the ongoing global pandemic. He noted that portfolio managers are tactically focused on “capital preservation across equity, fixed-income and commodity markets.”
Commodities, another bright spot in 2021, were up 23.57%, according to HFR, which saw funds ride the interest rate wave going into year-end in addition to record setting inflation metrics.
Overall managers that have demonstrated robust returns over the past two years will likely lead the way in performance and growth in 2022, according to Heinz.