As the year draws to a close, this issue of Hedge Fund Spotlight provides an insight into the hedge fund industry over the course of the year. It takes a month-by-month look at how returns were impacted by political and financial events such as:
- US equity markets posting highs
- Geopolitical tensions causing volatility
- Oil production cuts
- Bitcoin surging to record highs
Latest Trends and Statistics
- Hedge fund performance updates
- Cryptocurrency hedge funds
- Details of upcoming hedge fund conferences
Hedge Funds: 2017 In Review
As we approach the end of 2017, we examine the impact of some key events in the hedge fund industry over the year, taking a month-by-month look at how the hedge fund industry was effected by political and financial events throughout the year.
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January: Positive Beginnings As Us Equity Markets Post Highs
Over the course of 2017, US stock markets reached record highs, showing continuous growth as the US economy’s potential tax reforms encouraged strong positive market sentiment. This began in January, the month in which the Dow Jones industrial average reached 20,000 for the first time in its history; the index would go on to reach 23,000 in October 2017.
Hedge funds returned 1.53% in January 2017, (Fig. 1) the best start to the year for hedge funds since 2013 (2.60%). Equity strategies beat the wider hedge fund benchmark posting a strong 1.93%, having generated losses in the first month of the year for the past three years.
February: Performance Highs And President Trump Signal Potential Loosening Of Regulations
February saw the Dow Jones industrial average, S&P 500 Index and the Nasdaq Composite Index close at record levels for five consecutive sessions, a run not seen since 1992.
Hedge funds capitalized and February’s return of 1.04% drove the 12-month cumulative return of hedge funds to 13.92% (Fig. 2), the highest figure recorded in the past six years as hedge funds continue to build on the improved performance seen in 2016.
Also in February, President Trump signed executive orders to scale back regulation and conduct a full-scale review of Dodd-Frank.
March: European Markets Surge And Inflows Return
One of the key, ongoing election stories of 2017 reached its conclusion in March as Mark Rutte was re-elected as the Prime Minister of the Netherlands. Markets across Europe reacted positively with the FTSE 100 reaching a record high; Europe-focused hedge funds delivered 1.06% versus the 0.53% gain of North America-focused funds.
The improved performance of hedge funds was met with positivity in the investor community in Q1 2017; over the course of the first quarter, investors committed $19.7bn to hedge funds, reversing the trend seen throughout 2016; a year which saw investors withdraw $110bn from the asset class.
April: Gains In Europe Continue Following Election Of Macron
April saw more of the same in global equity markets, with another key European election driving positive market sentiment as polls showed Emmanuel Macron leading the French presidential election. Europe-focused hedge funds performed well in April posting 1.27% for the month, outperforming funds focused on North America (+0.69%) and Asia-Pacific (+0.55%).
In addition, we saw one of the biggest fund launches in recent years, Brandon Haley’s Holocene Advisors; the Holocene Advisors Master Fund operates $2bn as at June 2017.
May: Latin American Losses Amid President Temer Corruption Scandal
While hedge funds remained in the black for the month of May, Latin America-focused funds had a more challenging month and posted their only negative return (-0.90%) of the year. Brazil’s economy had been showing positive signs in the first five months of 2017; however, mid-way through the month another political scandal hit the country when President Michel Temer was formally accused of corruption. Hedge funds invested in the region were hit by falling stock prices and a weakening real.
Asia was the standout performer in May. Upbeat economic data in China and the Bank of Korea’s decision to keep interest rates at record lows spurred equity gains in major Asian markets. Asia- Pacific-focused hedge funds capitalized and posted gains of 1.34%.
June: Investor Views On Performance Improves
By H1 2017 hedge funds had returned 5.04% (as at June), the highest return in the first half of a year since 2009 (+16.91%). This improved performance did not go unnoticed by the investor community. Among active hedge fund investors interviewed by Preqin in June 2017, nearly half (45%, Fig. 6)) reported that their hedge fund investments had met or exceeded expectations over the past 12 months, a 24-percentage-point increase from the corresponding proportion in June 2016.
July: Oil Production Cuts Drive CTA Gains
July saw significant trend reversals in oil prices as Saudi Arabia and Nigeria announced agreements to cut their production of oil, driving the price of crude oil above $50. Following this positive trend, CTAs posted 0.99% in July, one of the strategy’s strongest monthly returns of the year (Fig. 7).
While the wider hedge fund industry saw net investor outflows of $110bn over the course of 2016, CTAs attracted $26bn in net inflows, highlighting the investor demand for this diversifying strategy. This activity has continued throughout 2017 with investors allocating $18bn to managed futures/CTA strategies in the first half of the year; however, a net outflow of $4.0bn in Q3 2017 could be a sign of shifting investor sentiment.
August: Geopolitical Tensions Cause Intramonth Volatility
Stock market volatility was seen around the world in August as tensions surrounding North Korea’s nuclear missile program intensified. The first half of the month saw investors move from stocks to more safe-haven assets, driving stock prices down and the price of gold up. However, as August drew to a close, markets largely recovered as investors’ fears surrounding the geopolitical tension eased.
The majority (53%) of investors interviewed by Preqin in December 2017 felt that equity market volatility had the greatest impact on their hedge fund portfolios over the course of 2017, a greater proportion than those citing the low interest rate environment (45%) and the possibility of interest rate rises (38%, Fig 8).
Europe-focused funds returned 0.21%; North America-focused funds posted a return slightly lower and into the red (-0.22%), while Asia-Pacific-focused funds (+1.07%) were the strongest performers of the three top-level regions.
September: Hedge Funds Continue To Return
In September President Trump unveiled plans for a new US tax system, driving gains in small-cap indices. Returns were seen across major stock indices, with the S&P 500 closing the month at an all-time record high as the dollar rose to a one-month high after strong economic data boosted expectations for a US Federal Reserve rate hike later in the year. These positive market conditions drove hedge funds to their second highest monthly return of the year (+1.24%).
The alternative risk premia sector has been grown rapidly in recent years and September saw one of the largest managers in the world enter the space. Man Group, which operates $60bn as at June 2017, launched its debut alternative risk premia product Man Alternative Risk Premia; the fund employs carry, defensive, momentum and value strategies.
October: Asian Markets Reach Near Decade-High
South Korea’s Kospi Index reached an all-time record high at the end of October after government reports showed that the country’s economy grew at its fastest rate in seven years in the third quarter of 2017. Positive trends were also seen in Taiwan, with the country’s central bank increasing its economic growth forecast by 4bps. The Nikkei recorded over two weeks of daily gains, reaching its highest close since 1996 following Shinzo Abe’s election victory. In the US, the dollar edged higher as investors awaited the outcome of the Fed's two-day policy and a nomination of the next Fed chair.
The Preqin Asia-Pacific Hedge Fund benchmark returned 2.22% in October, twice the level of the wider industry (+1.11%). As at October, Asia-Pacific was the top performing top-level region over 2017, returning 15.41% (Fig. 10).
November: Bitcoin Reaches $11,000 While FCA Issues Warning On Cryptocurrencies
2017 has seen a number of cryptocurrency-focused hedge funds enter the market as continued growth in the sector has led to an increase in investor demand for exposure to the instruments. Bitcoin reached a landmark value in the final days of November 2017: one unit of the digital currency became worth over $10,000 for the first time, with value further increasing to over $11,000 before falling back.
Earlier in the month the UK’s FCA issued a warning aimed at retail investors, highlighting the high levels of volatility seen in the cryptocurrency market and the higher fees involved in trading digital currencies.
Views on the sector from within the hedge fund industry remain mixed. Page 8 shows the results of Preqin’s November 2017 survey of over 350 fund managers and 200 investors active in hedge funds, including statistics on investor demand for cryptocurrency strategies and views of industry participants on the market.
*As a proportion of those hedge fund managers that offer alternative risk premia strategies
December: Investors Mixed On Whether Improved Performance Will Continue
2017 is on course to deliver the highest annual return for hedge funds since 2013 (12.73%), with the Preqin All-Strategies Hedge Fund benchmark reaching 9.93% by the end of November 2017. Ahead of Preqin’s 2018 Global Hedge Fund Report, Preqin interviewed over 200 investors active in hedge funds in December 2017 to ascertain their views on the industry, including their predictions for hedge fund performance in 2018.
Views were mixed as to whether hedge funds would be able to maintain the improved performance seen in the industry since the beginning of 2016. Nearly three-quarters (72%) of investors believe hedge fund performance will either improve in 2018 or remain level with 2017; however, over one-quarter (28%) believe hedge funds will not be able return at the same level of 2017 (Fig. 11).
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