According to Preqin, the third quarter of 2014 represents the best quarter for Commodity Trading Advisor (CTA) funds since Q4 2010. Returns of 5.52% in Q3 on top of 1.60% in Q2 have sent the benchmark to 2014 year-to-date returns of 7.13%. The recent strong performance posted by CTAs coincide with poor performance delivered by long/short and event driven hedge funds, mirroring trends seen in Q2 2012 and Q3 2011.

Other significant hedge fund trends seen in Q3 2014 include:

  • The average monthly return for long/short funds this year is just 0.3%.
  • Long/short funds suffered their worst month (-2.06%) since May 2012 (-3.65%), when markets were rattled by the prospect of Greece leaving the Eurozone as voters backed anti-austerity parties.
  • North America-focused hedge funds declined in Q3 (-1.43%), and funds targeting European opportunities (-1.46%) also faltered amid continued concerns over slowing growth in the Eurozone.

CTAs: Hedge Funds Performance Update: Q3 2014

Q3 2014 was the poorest quarter for hedge funds (-0.36%) (Fig. 1) since Q2 2012 and saw Preqin’s All Hedge Funds benchmark negative for both July (-0.14%) and September (-1.21%). Year-todate returns have now fallen to 3.33%, which compares poorly to the return of 7.77% posted by the industry in the same period in 2013.

CTAs continued their recovery with their best quarterly performance (+5.52%) since Q4 2010. Six consecutive positive months have grown their return for the year so far to 7.13%. Funds of hedge funds have made a positive return on a quarterly basis since Q2 2013, and their 12-month return (+6.24%) is comparable to that of single-manager funds (+7.20%).

August was the only month in the quarter to see all core hedge fund strategies deliver a positive return (Fig. 2), with September proving a challenge for long/short funds (-2.06%) in particular. The strategy has delivered a negative return for fi ve of the nine months of the year so far, accumulating 2.99%. Event driven funds had their poorest quarter (-2.32%) for over two years, though their 12-month return of 7.43% lags only CTAs (+9.60%) in a ranking of core strategies.

A turbulent quarter across all regions globally saw North America and emerging markets-focused funds hit hardest by a negative September across the board (Fig. 3). A slow-down in growth for the US equity markets (Fig. 4) was perhaps refl ected in the negative quarterly return of North America-focused funds (-1.43%), though the region remains the best performer over 12 months (+9.08%). Europe-focused funds have returned 2.04% in 2014 in comparison to 8.46% for the fi rst nine months of 2013.

Hedge funds CTAs

Hedge funds CTAs

Hedge funds CTAs

Hedge funds CTAs

Hedge Fund Launches in Q3 2014

The quarter saw 179 new hedge funds launched, an increase from Q2 of 11%. North America-based hedge fund managers represented a significant rise in the proportion of total hedge fund launches in the last quarter, increasing from 66% in Q2 2014 to 83% in Q3 (Fig. 2). Moreover, hedge fund managers are finding attractive investment opportunities in this region, as the proportion of hedge fund launches predominantly targeting North America increased from 21% in Q2 2014 to 29% in Q3 2014 – the highest level reached since Q1 2012 (Fig. 4). In contrast, the number of hedge fund launches that employed a global investment focus decreased by 13 percentage points to 46% in Q3, the lowest proportion seen since Q1 2012.

Long/short investment strategies proved to be the most prevalent among newly launched hedge funds in Q3 2014, accounting for 55%, up from 48% in Q2 (Fig. 3). In addition, 17% of hedge funds launched in Q3 employed an event driven strategy, an increase of seven percentage points on the previous quarter. Conversely, the proportion of hedge funds launching with a core macro strategy declined by 11 percentage points from Q2.

Single-manager hedge funds saw an increase in the proportion of new fund launches from 63% in Q2 2014 to 86% in Q3 (Fig. 1). Meanwhile, single-manager CTAs accounted for 6% of the total fund launches during the quarter, up from just 1% of single-manager CTA funds launched in Q2 2014. This increase correlates with the impressive performance of the CTA benchmark in recent months. Funds of hedge funds experienced a decline of 11 percentage points from the previous quarter and only accounted for 2% of total funds launched in Q3 2014.

Hedge funds CTAs

Hedge funds CTAs

Hedge funds CTAs

Hedge funds CTAs

Fund Searches Initiated in Q3 2014

In Q3 2014, Preqin added 109 new investor mandates to our Fund Searches and Mandates feature, which were gathered from Preqin’s conversations with investors over the quarter. Long/short equity continued to be the most sought-after strategy in Q3 2014, with over half (51%) of fund searches including a long/short equity component (Fig. 2), compared to 46% in the previous quarter. Macro was the second most common strategy, having been included in 28% of fund searches. This is a marked increase from Q2 2014 when only 19% of searches contained the strategy. There was also a signifi cant rise in demand for equity market neutral funds, with 14% of fund searches involving an equity market neutral element in Q3 2014, double the proportion of the previous quarter. Conversely, there was a pronounced fall in appetite for long/short credit, which was included in only 9% of searches this quarter, in contrast to 16% last quarter.

Commingled single-manager hedge funds remain by far the most in demand structure, having been included in 86% of searches issued by investors in Q3 2014 (Fig. 3). Additionally, singlemanager managed accounts were considerably more sought after by investors this quarter, with the proportion of investors seeking to invest in this structure increasing to 25%, up from 15% last quarter. Meanwhile, funds of hedge funds have clearly fallen out of favor; commingled funds of hedge funds appeared in 22% of searches in Q3, compared to 29% last quarter, and managed account funds of hedge funds were included in just 10% of searches in Q3.

On the other hand, fund of hedge funds managers represented a significantly higher proportion of searches initiated in Q3 2014 (59%) than in Q2 2014 (48%), as shown in Fig. 4. Consequently, the majority of other investor types are less well represented this quarter. This excludes public pension funds which issued 10% of fund searches in Q3, as opposed to 8% in the previous quarter.

Hedge funds CTAs

Hedge funds CTAs