As Hedge Fund Performance Disappoints, SWFs Gain Popularity

As Hedge Fund Performance Disappoints, SWFs Gain Popularity

With all the strategies and regional benchmarks logging losses for the second consecutive month, April of 2014 has turned out to be another underwhelming month for hedge fund performance, according to data from Preqin.

Play Quizzes 4

Preqin’s May 2014 report titled “Hedge Fund Spotlight” also highlights that sovereign wealth funds are playing an increasingly important role thanks to the substantial sums of capital managed by these investors.

Event-driven strategies are bright spot

In its April 2014 report, Preqin highlighted the overall hedge fund benchmark witnessed positive returns only in February, while January and March posted disappointing performance. However, event driven strategies funds continued to clock impressive returns, adding 2.77% in Q1 2014.

Connor Leonard Of IMC Explains: Here’s What Value Investors Should Know About Moats

moat 1557171753When it comes to value investing, one strategy that's often used is seeking out companies which have sizeable moats against competition. In a presentation for the Value Investing Club at Google earlier this year, Connor Leonard of the Investors Management Corporation explained two ways of looking at moats and how value investors can benefit from Read More

Highlighting this trend in April, the Preqin report points out that despite all strategies and regional benchmarks clocking red for the second consecutive month, the event-driven strategies benchmark was positive for the tenth consecutive month, posting a monthly gain of 0.60%, taking its year-to-date returns to 3.89%.

The Preqin report also highlights that discretionary funds have slightly outperformed those with a systematic approach in the first four months of 2014. As set forth in the following graph, during the first four months, discretionary funds logged cumulative returns of 1.70% compared to 1.18% clocked by systematic funds:

Hedge Fund Discretionary Vs Systematic

Interestingly, discretionary funds posted returns of 16.17% in 2013, which far exceeded the 8.61% return of systematic funds in 2013.

Increasing importance of sovereign wealth funds

Preqin’s report highlights the increasingly important role played by sovereign wealth funds in the investment industry landscape. Though they may be small in number, these investors are extremely large in terms of assets, as they represent roughly $5.38 trillion. As can be deduced from the following graph, a majority of sovereign wealth funds that invest in hedge funds are based in Asia-Pacific or the Middle East:

Sovereign funds invest in APAC funds Hedge Fund

As reported earlier, sovereign wealth funds represent roughly 16% of the total capital invested in hedge funds by $1 billion plus investors.

The Preqin report points out that nearly 59% of sovereign wealth funds invest in hedge funds through a combination of direct investments and the various funds of hedge funds. The following graph illustrates the preferred investment methods of sovereign wealth funds:

Preferred investment method by sovereign funds Hedge Fund

Hedge fund vs Volatility trading fund

Preqin’s May report on “Hedge Fund Spotlight” also highlights the significance of volatility trading as a hedge fund strategy in recent years. With several institutional investors looking for hedge funds that can deliver consistent risk-adjusted returns, volatility traders are well positioned to take benefit of this interest. As depicted in the following graph, volatility trading funds have offered more consistent returns, and the average three-year annualized return for volatility trading funds is 7.02%, ahead of the overall hedge fund average of 5.70%:

Volatility trading funds Hedge Fund

Updated on

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
Previous article Apple WWDC: iOS 8, Beats, Home Automation [PREVIEW]
Next article Barry Ritholtz: This Is Your Brain On Stocks

No posts to display