Hedge funds had another strong quarter in the second quarter, according to the latest report from Citco. All strategies posted a weighted average return of 6%.
Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 5, 2020 at Wall … [+]
Hedge fund performance and flows
Commodities hedge funds were the best performers, with a weighted average return of 8.33%. Global macro was the worst-performing strategy, although even it was up 1.34% for the second quarter.
More than 80% of hedge funds delivered a positive annual return during the second quarter, compared to more than 70% in the first quarter. Decian Quilligan of Citco said one theme that emerged from their second-quarter performance metrics was that larger funds did better than smaller funds.
Quilligan believes this trend appears in performance by assets under administration, where funds with more than $3 billion produced the highest return at 7.69%. The trend was also displayed in the higher weighted average returns compared to the median in most categories. The overall median return for funds of all sizes was 2.95%, compared to 6% for the weighted average return.
Investor flows
Capital flows were positive for the second quarter, which brought solid net inflows to its administered funds. Gross subscriptions amounted to a massive $50.5 billion, while redemptions of $41.8 billion resulted in $8.7 billion in net inflows.
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He said multi-strategy hedge funds benefited the most from investor allocations during the quarter, followed by global macro funds, private equity hybrids and funds of funds. Equities and arbitrage funds saw net outflows.
Inflows were evenly dispersed across all fund sizes. Those with less than $1 billion in assets under administration, those with more than $10 billion, and those in between attracted capital. He added that a recent trend was reversed in the second quarter as Asian managers recorded outflows, while European and North American managers saw inflows.
Trade volumes
Trade volumes in April continued the trend observed in the first quarter. They dipped from the record levels in March, although they were still 14% higher than a year ago. He said the only similarity between April 2021 and April 2020 was the sharp increases and declines through a number of intense trading sessions.
In May, volumes increased again by 3.5%. Quilligan notes increased deployment in options and futures on commodities, indices and equities. Volumes in May were 12.9% higher than May 2020’s volumes. In June, volumes climbed another 4.5% from May.
On a year-to-date basis, average volumes were 8.5% higher than the first six months of 2020 and 9% higher than the second half of 2020. Quilligan looked at trends over the last 18 months and found a strong correlation of volumes to market volatility.
He noted that the VIX averaged 31.9 in June 2020 and rose much higher earlier in the second quarter of the same year. However, the VIX was at 16.95 in June 2021, which was the closest yet to pre-pandemic levels. As expected, the different market environments resulted in the use of different asset classes.
Use of equity swaps
Equity and equity swaps continued to be the most used by managers. He said trading of equity swaps was up 44% in the second quarter compared to a year ago when he first observed broader use of the product among Citco’s client base.
In fact, March brought the highest volumes ever in line with certain market events, and deployment was sustained across the firm’s clients through the second quarter. June volumes were second only to March.
Quilligan also observed strong interest in credit default and interest rate swaps at the end of the first quarter. CDS volumes fell back to normal levels, although interest rate swap volumes hit a record high at the end of the second quarter. June also brought increased deployment in swaptions, bank debts and currency futures.
