Put Into Perspective: Fund Of Funds Outperform Hedge Funds In Past Year by Skenderbeg Alternative Investments
The latest report from eVestment showed that over the past year, funds of hedge funds have performed better than hedge funds them-selves. The semi-annual report for July reported that the average fund of funds gained 6.65% from May 2014 through May 2015 while the average hedge fund gained 5.84%.
These figures are on a global scale, but the same held true with US focused funds as well. Just looking at domestic funds, FoHFs were up 5.65% during the period discussed while single manager funds were up 4.73%.
Not surprisingly, the top performing FoHFs were those focused on the Asia-Pacific region. Funds focused exclusively in the region gained an average of 14.77% year over year. It is also worth mentioning that the report showed an uptick in volatility in both FoHFs and single manager funds. For FoHFs volatility increased by 5.34% during the 12-month period and for single manager funds, the increase was 9.79%.
Hedge fund withdrawal requests drop to 2-1/2 year low in July
Investors kept their money in hedge funds in July amid market volatility over Greece and China, with requests to take cash out dropping to their lowest levels in 2-1/2 years.
The SS&C GlobeOp Forward Redemption Indicator, a snapshot of withdrawal requests expressed as a percentage of assets under administration, fell to 2.08 percent in July from 4.72 percent in June, fund administrator SS&C Technologies said in a statement. This was the lowest level since January 2013.
A new era for hedge funds?
Lyxor Research published a report titled A New Era for Hedge Funds?. The report highlights that while hedge funds have underperformed traditional asset classes during the last few year, there is good reason to think the worm is turning.
Although hedge funds can boast of a strong record track record over recent decades, the industry has been pressured to make changes for the last couple of years. Notably, inflows into the sector remain steady, but keep in mind that hedge funds have reduced both management and performance fees as a result of the changing environment.
Philippe Ferreira and the rest of the Lyxor team take a closer look at the main drivers of hedge fund returns and come to the conclusion „that the normalization of US monetary policy and US equities’ loss of momentum will lead to HF outperformance versus traditional asset classes. We expect annual excess returns in the 5-6% range.“
The chart makes it clear that hedge funds have provided lower returns than stocks and bonds for more than six years. Since early 2009, global stocks have given compound annual returns around 18% per year (in total return) while hedge funds have produced compound re-turns under 8%. Of interest, a portfolio of equities and bonds (60/40) has also produced notably higher returns of 12.7% annually.
Ferreira and colleagues argue that the drop off in bond yields following the Fed’s QE has had a major negative impact on hedge fund perfor-mance. They also point out that equity beta has decreased while stock markets moved up, and alpha generation is off due to the low volatil-ity and low dispersion environment.
The Lyxor team extends their argument and notes: “However, alpha generation has started to rise since mid-2014 and the environment is now improving, with valuations stretched across the board, the economic cycle maturing and the Fed beginning to normalize monetary policy.”
Forecasting the future
Looking forward with conservative assumptions, Ferreira et al. anticipate that hedge funds will deliver annual returns in the 5-6% range with low volatility for the next several years. They conclude: „We believe that diversifying portfolios with an increased allocation to alternatives is particularly attractive at this point in the cycle. Hedge funds have demonstrated their ability to protect portfolios against wide market fluctuations, a scenario that we cannot exclude as the Fed turns the screw.“
Hedge funds see more demand fueled by solid first half returns
Hedge funds will likely attract billions of dollars in new money in the next six months after posting solid returns in the first half even as Wall Street’s sell-off, sparked by Greece’s debt drama, took a bite out of some managers’ June returns. Hedge funds that bet mainly on stocks could take in as much as US$14 billion in fresh cash in the second half, roughly double what came in during the first five months of the year, according to forecasts from industry research firm eVestment. „There are a lot of assets in play and what is driving these flows to hedge funds is a redistribution away from traditional exposures,“ said Peter Laurelli, eVestment’s head of research.
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