This month’s edition of Hedge Fund Spotlight highlights the opportunities and challenges facing managers of hedge funds this year, including:

2016 Hedge Fund Letters

  • AUM and performance expectations for 2017.
  • Key drivers of change in the industry and the impact of global events.
  • The challenging fundraising environment.
  • Planned fund launches this year.

Hedge Fund Manager Outlook For 2017

Using the results of Preqin’s survey of over 270 hedge fund managers for the  2017 Preqin Global Hedge Fund Report, we look at what 2017 holds for managers in the industry.

Following a year which saw hedge funds post their highest return since 2013, as well as high-profile investors withdrawing from the asset class, Preqin surveyed over 270 hedge fund managers in November 2016 to find out their views on how events in 2016 affected their portfolios and their plans for addressing investors’ current sentiment towards the asset class.

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Fundraising Difficulties In 2016

As reported in the 2016 Preqin Global Hedge Fund Report, nearly a third (32%) of investors planned to deploy less capital in hedge funds in 2016 than in 2015, compared with 25% that planned to invest more capital. This investor sentiment looks to have impacted fundraising in 2016, as nearly half (47%) of fund managers surveyed for the 2017 Preqin Global Hedge Fund Report experienced a more challenging fundraising environment over the past year (Fig. 1). However, the fundraising challenges varied by region. In Europe, approximately equal proportions found it less challenging (36%) as found it more challenging (39%). In contrast, in North America, half of all fund managers found fundraising more challenging and just 28% found it easier than in 2015.

Hedge Funds

In addition, 36% of all respondents believe it was harder to retain assets in 2016 compared to 2015 as investors continued to evaluate their hedge fund allocations.

Industry AUM Expected To Grow

In the face of a more challenging fundraising environment, fund managers remain upbeat: 40% of survey respondents believe hedge fund industry assets will increase over the course of 2017 (Fig. 2). Europe-based managers are particularly bullish on the outlook for fundraising in 2017: over half (52%) believe industry AUM will grow over the year.

While addressing investor concerns around performance and fees will be a key challenge in the year ahead, fund managers will look to build on the improved performance of the past 12 months and make 2017 a year in which to revive investor sentiment.

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Major Challenges For 2017

By a significant margin, fund managers surveyed in November 2016 view performance (73%) and investor demand for more favourable fees (64%) as the leading challenges facing the hedge fund industry in 2017, issues that have become more prominent since Preqin’s survey in November 2015 (Fig. 3). While industry performance has improved over the past 12 months, fund managers will want this improvement to continue as we move into 2017.

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Global Events Impact Performance In 2016

The Preqin All-Strategies Hedge Fund benchmark posted 7.34% in 2016, its highest annual return since 2013 (+12.47%) and more than trebling the gains of 2015 (+2.14%). However, the Preqin All-Strategies Hedge Fund benchmark still lagged the S&P 500 PR (+9.54%) by two percentage points.

Markets around the world witnessed volatility in 2016: the GB pound hit a 31-year low against the US dollar following the Brexit vote, oil prices surged as OPEC and non-OPEC states agreed to restrict output and US stock markets reached record highs following President Trump’s election. However, as seen in Fig. 4, fund managers around the world saw different events impact their performance in different ways.

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The greatest proportion of respondents located in North America (41%) reported that the US election had the most significant positive effect on performance, perhaps driven by US stock markets reaching record highs in late 2016. Thirtyfive percent of Europe-based managers also saw the US election positively impact their performance, again the largest proportion; however, a significant 33% of Europe-based managers reported that they were negatively affected by this event, highlighting the various effects of the US election on global markets. Crowding of trades had the most significant negative impact on performance for the largest proportion (34%) of North America-based respondents, while 38% of Europe-based fund managers reported that the Brexit vote had a negative impact on their performance. Interestingly, fund managers based in Asia & Rest of World had a split opinion on the effect of US interest rate policy, with significant proportions reporting their performance was affected positively (41%) and negatively (32%) by this event.

Improved Performance Expected Over 2017

With the 2016 Preqin All-Strategies Hedge Fund benchmark (+7.34%) outperforming the 2015 benchmark (+2.14%), Preqin asked respondents for their expectations of performance in 2017 relative to 2016. A significant proportion (47%) believe the improvement in hedge fund performance will continue and the 2017 benchmark will surpass the 2016 return (Fig. 5). Interestingly, nearly a quarter (23%) of fund managers were unsure how performance in 2017 would compare to 2016, perhaps an indication of widespread uncertainty in the industry at present.

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In 2016, event driven strategies generated the highest annual return (+13.11%) of all top-level hedge fund strategies. At the other end of the performance spectrum, managed futures/CTAs, which recorded the best Q1 2016 return of all top-level strategies (+1.68%), finished the year with a return of just 1.12%.

Preqin asked respondents to predict how the seven top-level strategies would perform in 2017; using a weighted average of the rankings, fund managers predict that equity strategies will be the leading strategy in 2017 (Fig. 6). Credit strategies, the second best performing top-level strategy in 2016, are predicted to be the worst performing strategy in 2017 for the third year in a row. Meanwhile, with macro strategies expected to be the second best performing strategy in 2017 and managed futures/CTAs up to fifth, despite posting the lowest returns in 2016, fund managers anticipate opportunities in commodity markets in the coming year.

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Planned Launches In 2017

Compared to the 29% of respondents that were planning on launching a new fund in 2016, 37% plan to bring a fund to market in 2017, a significant increase. Furthermore, over a quarter of respondents planning to launch a fund in 2017 will be launching a strategy that is new to their firm, thereby increasing their range of solutions available to investors.

Hedge Fund Fees: Investor Views And Fund Manager Reaction

We look at investors’ attitudes to hedge fund fees and conditions and how hedge fund managers are reacting to these concerns.

Management Fees

Management fees continue to be at the forefront of investors’ concerns. Although the majority of respondents to Preqin’s last three investor interviews reported that they had seen an improvement in this area, over three-quarters (76%) of investors surveyed in December 2016 want to see further improvements in management fees over the course of 2017 (Fig. 1).

As illustrated in Fig. 2, fund managers have reacted to investors’ calls for lower management fees: the mean fee

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