Data from Preqin’s Hedge Fund Analyst reveals that hedge funds have suffered their worst first quarter in terms of performance since 2008, with the Preqin All Hedge Fund Strategies benchmark up 1.23% year-to-date (YTD). This is in contrast to both 2012 and 2013 when hedge funds achieved their highest returns in Q1, with quarterly returns of 6.07% and 3.76% respectively.

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Event driven was the best performing strategy in the first quarter of the year with the event driven benchmark posting average returns of 2.94%, while macro strategies again underperformed compared to the overall hedge fund benchmark with returns of 0.51% in Q1 2014.

Hedge Funds: Other Key Facts

  • The strong performance of event driven funds is reflected in increased investor interest in the strategy; 21% of investor searches initiated in Q1 2014 included an event driven component, a four percentage point increase from Q4 2013.
  • Long/short equity continues to be the most targeted strategy by institutional investors, with the strategy included in 68% of investor searches in Q1 2014. Long/short strategies also represented a higher proportion of fund launches in Q1 (53%) than in any of the previous quarters since Q1 2012.
  • The developed markets of Europe and North America presented the best opportunities for hedge funds in Q1 2014, with funds focusing on these regions up 3.21% and 3.12% respectively, outperforming Asia-Pacific (+0.66%) and emerging markets-focused funds (-0.01%).
  • The improved opportunities in these regions is highlighted in the proportions of fund launches focusing on each region; the proportion of launches represented by Europe- and North America-focused funds increased by two percentage points between Q4 2013 and Q1 2014.
  • Fund of hedge funds managers represented a higher proportion of all fund launches in Q1 2014 (12%) than they did in Q4 2013, as well as a higher proportion of investor searches initiated (66%).
  • CTAs continue to post disappointing returns with these funds in the red YTD (-0.13%); however, there was a five percentage point increase in the proportion of investor searches targeting CTAs between Q4 2013 and Q1 2014.

Comment:

“The mood entering 2014 was buoyant for the hedge fund industry, following two back-to-back years of double-digit returns in 2013 and 2012. However, the first quarter of 2014 has been one of mixed results, representing the worst start to the year for hedge funds since 2008. January and March returns were both in the red, with only February’s benchmark performance of 1.75% keeping performance in positive territory for the quarter. Event driven strategies continue to lead the way, with more investors willing to take on the illiquidity premium of investing in these strategies in Q1 2014 than in Q4 2013. Fund managers are predicting that developed markets will outperform emerging markets in 2014, and the first quarter results support this outlook; developed markets-focused funds posted returns of 2.21% compared to the 0.01% loss suffered by emerging markets funds.

Despite the volatile start to the year, investors look set to stay the course with hedge funds in the short term as fund searches continue to be issued for the year ahead. The industry will be waiting to see how the second quarter of the year unfolds, not only in terms of performance, but also in how investors and fund managers react to the changing market conditions both in terms of new capital flowing into the asset class, and what funds pick up these inflows.”

Amy Bensted, Head of Hedge Funds Products