While assets under management increased by over $360B during 2013, the hedge fund industry was unable to outperform the gains racked up by the major equity indices.

However, this did not seem to bother institutional investors.

“Evidently, institutional investors are increasingly looking beyond absolute returns, and are focused on the ability of hedge funds to deliver attractive returns combined with low volatility and low correlation with other assets – in other words, their ability to favourably impact the whole portfolio’s risk-adjusted returns,” says Preqin’s CEO Mark O’Hare. “As a consequence, institutional investor satisfaction with hedge fund performance is at its highest levels since Preqin started recording this in 2008,” he adds.

Hedge Fund performance strategy-cumulative

As can be seen from the above chart, hedge funds consistently outperformed the S&P 500 (INDEXSP:.INX) between 2009 and 2012. Only in 2013 do we see the index take a lead, a sizable one at that, over hedge funds.

Lower drawdowns and volatility

CEO O’Hare’s point is well proved with the following charts which show the steady improvement in hedge funds’ risk management over recent years.

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Note in the above chart how the size of the drawdowns has reduced steadily between 2011 and 2013.

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“Since the start of 2011, hedge fund volatility has decreased steadily from 10% to 5%,” says the report, with reference to the above chart. “This has supported an average Sharpe ratio of 1.1 and a high of 2.0, indicating that hedge fund managers remain adept at generating additional returns by taking on additional risk.”

Preqin’s top-performing hedge funds

Preqin’s review identifies certain hedge funds that gained over 100% during 2013, as shown in the table below.

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The funds which generated over 200%

Northwest Warrant Fund is a Japan-focused equity hedge fund that usually invests in convertible bonds, sells of the fixed income portion via asset swaps and retains the options that entitle the fund to convert the instrument into shares. As seen from the table above, it generated 223.88% in 2013.

“Avant Capital Eagle Fund runs a Long-Short equity strategy in the Greater China markets (companies mainly listed in Hong Kong and the US), with an emphasis on being early mover in under-valued and under-researched stocks as well as investment in special situations,” says the fund website. The fund prefers to operate a concentrated portfolio and seeks out catalyst/event driven shorts.

This fund generated 214.71% in 2013.