Business

2014 Hedge Fund Flows Dampened By H2 Redemptions

Hedge funds closed the final month of the year in positive territory with the Eurekahedge Hedge Fund Index up another 0.25% in December while the MSCI World Index finished the month down 0.80%. In 2014 as a whole, hedge funds were up 4.57%, falling behind underlying markets as the MSCI World Index returned 6.79% over the same period. Roughly 18% of the fund managers have posted double digit returns in 2014, down from 35% in 2013.

 

Key takeaways for the month of December 2014:

  • The US$2.14 trillion hedge fund industry grew its asset base by US$125.9 billion in 2014, roughly half of the US$240.4 billion increase recorded in 2013.
  • Net investor flows for 2014 were down to US$39.8 billion from US$137.5 billion in 2013, with 2H 2014 seeing investors redeem US$36 billion.
  • Asia ex-Japan investing hedge funds outperformed their global peers for the third consecutive year returning 9.39% in 2014 – the highest among all regional mandates.
  • CTA/managed futures funds delivered the best performance among all strategic mandates, up 9.60% in 2014 as managers won big on oil and currency futures.
  • On a year-to-date basis, Indian hedge funds are the top performers with gains of 39.05% while Eastern Europe and Russia mandated funds delivered the worst results down 22.58% for the year.

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Regional Indices

Eurekahedge Regional Indices Dec
2014*
2014 Returns 2013 Returns
North American 0.72 6.23 10.55
European 0.08 1.15 9.22
Eastern Europe & Russia -3.15 -22.58 -0.99
Japan 1.00 6.16 27.81
Emerging Markets -0.77 3.35 5.23
Asia ex-Japan 1.04 9.39 11.88
Latin American -1.61 2.22 1.65

 

2014 on the whole has been a mixed bag – while the US economy continued to recover and post solid job gains, the Eurozone and Japan remain mired in their struggle against anaemic growth. Emerging economies have registered divergent prospects as well, while oil exporting countries such as Russia are battered by the steep decline of the value of oil prices, others such as India are reaping the windfall of lower prices. The Chinese economy is also treading the path of moderation, with annual GDP growth rate hovering around 7% which adds to the overall concern regarding global economic growth.

 

Global equity markets largely traded sideways to end December in negative territory, fuelled by further steep falls in oil prices and fears of a global slowdown. Volatility also picked up in the final trading month of the year amid the atmosphere of uncertainty, which was reflected in the CBOE VIX Index which rose 44.04% to 19.2 during December. Despite closing lower, improving fundamentals and non-farm payroll numbers managed to support US equities higher during the month, bolstering confidence in the country’s recovery. On the other hand, markets in the EU have struggled in the face of a near-zero growth outlook, declining demographics and the resurgence of a possible Greek exit from the Eurozone. In its ongoing attempts to combat the risks of deflation through quantitative easing, the European Central Bank recently clarified its intention to embark on large-scale asset purchases centered on government bonds in early 2015. Divergent central bank policies continue to widen the spread between US and European bond yields, causing the Euro to depreciate further.

 

For hedge funds in December, Eastern Europe and Russia saw their sixth consecutive month of losses as the Eurekahedge Eastern Europe & Russia Hedge Fund Index fell 3.15%, though managing to outperform the Russian RTS stock index which plummeted 18.84%. Further falls in oil prices during the month continued to put heavy pressure on the heavily oil dependent Russian economy and the rouble, prompting the Russian central bank to make a drastic overnight interest hike to 17% to defend its currency. Latin American managers were also down 1.61%, negatively impacted by the broad sell-off in commodities and local currencies as the MSCI Latin America Index4 dropped 5.82%. On the other hand, Asia ex-Japan focused hedge funds posted the best returns of 1.04% in December, with managers reporting strong gains from their exposure to Chinese counters. The China CSI 300 Index rocketed 25.81% during the month amid a raging bull market which was sparked off by the interest rate cuts last month, improving property market and improved investor access from the Shanghai-Hong Kong stock connect. Mangers investing with a Japan mandate also made strong gains of 1.00% in December, outperforming the benchmark Nikkei 225 which lost 0.05%.

 

Strategy Indices

 

Most of the salient macroeconomic themes from November maintained their relevance going into December; mainly the fall in oil prices and the impact of divergent central bank policies. CTA/managed futures managers posted the largest return out of all strategic mandates at 1.41%, with short energy positions once again dominating performance as oil prices continue to slide downwards following worries over a fall in global demand. Currencies also contributed to performance as December extended the rally in the US dollar. Arbitrage, multi-strategy and event driven funds were also up 0.41%, 0.12% and 0.01% respectively. On the other hand, distressed debt and fixed income strategies were down 1.92% and 0.68% as expectations of further easing from the Bank of Japan and the European Central bank to avert deflation caused the drop in global government bond yields. Distressed debt assets were on the losing end during the month as the correlation between high yield bonds and the energy sector caused the prices of junk bonds to fall. A number of energy producing companies had borrowed heavily in the high yield markets to finance their operations. Decreasing oil prices has meant that these companies would find it increasingly hard to service their debt payments and this possibility of a debt restructuring has led to expectations of an increase in the overall junk bond default rate, resulting in an adverse impact on funds which were holding debt in these companies.

 

Eurekahedge Strategy Indices Dec
2014*
2014 Returns 2013 Returns
Arbitrage 0.41 3.37 7.15
CTA/Managed Futures 1.41 9.60 -0.16
Distressed Debt -1.92 -0.51 15.92
Event Driven 0.01 1.82 13.03
Fixed Income 0.68 3.53 9.19
Long/Short Equities -0.05 3.41 15.58
Macro -0.02 3.70 3.43
Multi-Strategy 1.12 4.70 7.38
Relative Value -0.02 2.37 6.14

 

Mizuho-Eurekahedge Indices Dec
2014*
2014 Returns 2013 Returns
Mizuho-Eurekahedge Index – USD -0.50 1.20 6.53
TOP 100 Index – USD -0.37 2.34 6.06
TOP 300 Index – USD -0.48 1.73 6.38