Hedge Funds Q2 2016 Asset Flows by Preqin
Check out the part about activists pretty shocking stats
Drivers of Change in the Hedge Fund Industry: Performance
With recent returns lower than investors have come to expect, the performance of the hedge fund industry is under increasing scrutiny. Joe McGee takes a closer look at the performance of the asset class and its implications, using data from the 2016 Preqin Alternative Assets Performance Monitor and upcoming Preqin Investor Outlook: Alternative Assets, H2 2016.
- With 79% of investors reporting that their hedge fund investments have fallen short of expectations over the past 12 months, both fund managers and investors have identified performance as a key issue in the hedge fund industry today.
- Total industry returns have fallen short of investor expectations; however, as the Preqin All-Strategies Hedge Fund benchmark encompasses a range of vehicles investing across different strategies, there are some funds – particularly CTAs – that are meeting investor requirements.
- Due to the proliferation of funds in recent years and the wide dispersion between the top performing strategies and individual managers in the industry today, investors are finding it more difficult to pinpoint the most attractive investment opportunities in the current environment.
Following returns of 1.97% in 2015, the Preqin All-Strategies Hedge Fund benchmark returned 1.09% in the first six months of 2016. With industry returns considerably below the double-digit figures experienced in 2009, 2010, 2012 and 2013, investors have become increasingly concerned about the impact of hedge fund performance on their portfolios: 79% of investors surveyed for the upcoming Preqin Investor Outlook: Alternative Assets, H2 2016 felt that their hedge fund investments had fallen short of expectations over the past 12 months, up from 33% in December 2015 (Fig. 1.).
Using data from the recently launched 2016 Preqin Alternative Assets Performance Monitor and forthcoming Preqin Investor Outlook: Alternative Assets, H2 2016, we look at how different strategies have performed, investor views on hedge fund performance and the role that the asset class can play in investor portfolios.
Behind the Headline Numbers
Behind the industry benchmark, there are a wide range of vehicles investing in different instruments, strategies and regions – some of which have performed better than others in the current economic environment (Fig. 2). Among top-level strategies, macro strategies were the top performing over the past 12 months (+3.14%), followed by CTAs (+2.49%). Relative value strategies were the highest returning strategy over a three-year period (+5.22% annualized) with the lowest three-year volatility (1.84%).
Equity strategies, on the other hand, have performed worse than other strategies over the past 12 months, particularly in the second half of 2015 (-4.35%), when the volatility in Chinese financial markets spread to equity markets worldwide. Although they have better long-term performance (+4.79% three-year annualized), they also have the highest three-year volatility (6.17%).
For individual sub-strategies, there is a large difference between the top performing sub-strategy (CTA – Counter-Trend, +7.11%) and the worst performing (Sector-Focused, -11.01%, Fig. 3). Other top performing sub-strategies include asset-backed lending (+6.36%), pattern recognition CTAs (+6.29%) and relative value arbitrage (+6.13%), while distressed and long bias funds also had a difficult year (-7.41% and -6.14% respectively).
Factors Affecting Performance
When asked about the major events affecting performance in H1 2016, a large proportion of fund managers felt that continuing uncertainty about China had negatively impacted performance in the first half of the year, particularly for fund managers based outside North America and Europe (71%, Fig. 4). In North America, crowding of trades was also seen as a negative factor, with 41% of respondents believing that this had negatively affected their funds.
On the positive side, significant proportions of North America- and Europe-based fund managers felt that they had benefited from changes in oil and commodity prices in the first half of the year. Fund managers based elsewhere felt that interest rate policy in Europe, Japan and the US had benefited their funds.
Investor Satisfaction with Performance
Although investors surveyed by Preqin reported a general dissatisfaction with the recent performance of the asset class, they recognized that some funds had outperformed others and expressed varying levels of satisfaction with different hedge fund strategies (Fig. 5). Among the better performers relative to investors’ expectations were systematic CTAs: 92% of investors felt that these met their targets. Discretionary CTAs and credit strategies also performed comparatively well, meeting the expectations of 63% and 50% of investors respectively. At the other end of the scale, no investors surveyed felt that their activist investments had met their expectations – a sign of a difficult H1 2016 for activist funds marked by, among other things, the continued share price decline of Valeant Pharmaceuticals, a former activist favorite.
While many investors feel that some hedge fund strategies have been meeting their targets, a significant proportion remain concerned that their overall portfolio of hedge funds has not been living up to expectations recently: 41% of investors surveyed by Preqin reported that they have reduced confidence in the ability of hedge funds to achieve portfolio objectives over the past 12 months, compared with only 12% that reported increased confidence (Fig. 6).
A key difficulty for investors is fund manager selection: even within strategies, returns vary considerably between different funds. As shown in Fig. 7, the interquartile range for the returns of equity strategies funds over the previous 12 months is over 15 percentage points, while credit strategies have the least variation, at 6.8 percentage points. With more than 15,900 active hedge funds open to investment today, investors are finding it harder to identify the better performing funds. Forty-six percent of investors surveyed by Preqin for the upcoming Preqin Investor Outlook: Alternative Assets, H2 2016 stated that it is currently more difficult to source attractive investment opportunities than 12 months ago, compared with only 6% that are finding it easier.
The Role of Hedge Funds in Investor Portfolios
Nevertheless, despite investor concerns about short-term performance, returns over the longer term have been more promising, with five-year annualized returns of 5.26% for hedge funds and 4.53% for CTAs. Such returns are often compared unfavourably with equity indices such as the S&P 500 Index, but these comparisons are not always justified. Investors surveyed by Preqin have previously indicated that they value hedge funds less because of the possibility of high absolute returns than because of the role that they can play in helping to diversify investors’ portfolios, as well as providing low correlation to other asset classes and reducing portfolio volatility.
The 2008 Global Financial Crisis (GFC) highlighted the extent to which many institutional investors needed to diversify into alternatives such as hedge funds, as the traditional “60/40” portfolios of equities and bonds failed to protect assets during the crash. Hedge funds fell only -17.35% overall in 2008, compared with -38.49% for the S&P 500 Index, with certain strategies such as macro strategies performing better (+4.35%).