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Preqin Reveals Hedge Fund Success Traits Over Past Year

As the U.S. Federal Reserve prepares to wind down its quantitative easing, the November Hedge Fund Spotlight report from Preqin notes that “many are predicting further turbulent times ahead for financial markets across the globe.”  With this in mind, they consider trends in hedge fund strategies that have worked over the past year.

Hedge Funds Preqin geo location

Hedge funds’ geographic and strategic trends

The report observed that more than ever, with uncertainty abounding, the ability to deliver absolute returns regardless of market conditions is an in-demand skill among fund managers. With this as a backdrop Preqin isolated geographic and strategic trends in what is working in hedge funds. In short, gaining interest are small funds, some with an overseas exposure, particularly in Europe, and managed futures CTA strategies as well as macro investment methods all have been performing above average.

While managed futures CTAs comprise only eight percent of Preqin’s hedge fund database, they more than double that number of the most successful, accounting for 19 percent of the top 100 performing hedge funds. The report considered October 2013 to September 2014, thus October 2014, generally positive for CTAs, was not included in the study.  Hedge fund fund of funds, by contrast, made up 17 percent of the total Preqin hedge fund universe but only accounted for 3 percent in the top 100. Most were single manager funds, which made up 69 percent of the Preqin database but 67 percent of the top 100.

Hedge Funds Prequin strategy returns

 

Hedge funds: Macro strategies had the highest distribution of returns

Macro strategies had the highest distribution of returns. As the best performing strategy in the top 100, with 27.51 percent performance over the study period, but the average performance of the strategy was 4.66 percent. Long / short hedged strategies in the top 100 generated 26.59 percent returns, while the strategy had an average performance of 7.91 percent, interesting given the stock market is higher over the study period. Typically the short end of the strategy drags down performance during bull markets.

Hedge funds Prequin geo top performance

 

In regards to geographic region, the US led the pack of best performers, with 45 percent of the total funds in the top 100. But it was European hedge funds, on the back of difficult equity market performance in the region, that grabbed a large share of the top 100 relative to their total population in the database. Europe-based hedge funds represent 21 percent of all funds in the Preqin database, but grabbed 35 percent representation in the top 100.  Within this subset, funds from the U.K. were most widely represented, as London fights with New York for the title of “world financial capital.” Other funds from Asian and Latin America indicate a growing diversification of talent across the globe, the report noted.

Fund size was also an interesting nugget to consider. Preqin observed the general trend is that larger funds who made the top 100 tended to be clustered near the lower end of the rankings.  “Smaller funds have proven themselves more nimble and have outperformed their larger counterparts,” the report concluded.