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Hedge Funds Had a Washout Third Quarter

Is Greece coming back to haunt the financial markets?

“Hedge funds are in the red for the quarter, the first negative quarter for the All Regions and Strategies Hedge Funds benchmark since Q2 2012, when concerns surrounding Greece leaving the Eurozone caused equity markets to tumble,” says Preqin’s Quarterly Update on hedge fund performance for the third quarter 2014.

The star strategy was CTA – returning +5.52% during the quarter and +7.13% year-to-date – presumably benefiting from the huge trends in the strengthening dollar and weak crude oil.

CTAs shine

“This is the strategy’s best quarterly performance since Q4 2010 and the first time it has had six back-to-back months of positive returns since the end of 2008,” observes Preqin. With the turmoil in global markets, and the innate ability of CTAs to provide a cushion against downtrends, these funds may prove more attractive to investors down the line.

Hedge Funds structure

Event-driven hedge funds on the back foot

At (-)2.32%, event driven strategies were the lemons for the quarter, perhaps suffering from the crackdown on tax inversion deals, though overall the healthy trends in global M&A (at $2.75 trillion, volume is a third higher than the same time last year, says the WSJ) could still work in favor of the strategy. Fund managers remain bullish, reports Preqin, observing that event driven fund launches have reached their highest proportion of quarterly fund launches since Q3 2007. Nevertheless, event driven funds had their worst quarter in over two years, according to Preqin.

Hedge Funds by-strategy

Macros may get some love

Funds following macro strategies had a middling quarter, generating a +0.53% return versus +1.80% during Q4 2013. Though new fund launches had only a small (13%) proportion of macros, this was the lowest level seen since 2007.

But this may change, given the rise in volatility in global markets and the emerging divergence in macroeconomic policies between central banks (for example, Japan and the Eurozone are in stimulus mode, while the US is winding down QE). This could release tradable opportunities in forex and interest rate differentials that macro funds could take advantage of.

Hedge funds return

Investors may already be recognizing this. “For managers of macro hedge funds, there is heartening news; appetite for these funds has returned to levels seen in 2013, with the proportion of fund searches initiated by investors for a macro fund increasing to 28% of searches initiated in the quarter compared to 19% in Q2 2014,” says Preqin’s analysis.

Outlook for the rest of 2014

According to Preqin, data points to an increasing investor preference for macro strategies versus long-short, and a demand for new strategies that could provide greater diversification within portfolios.

Hedge funds performance