Foreword – Amy Bensted, Preqin

Much of the narrative surrounding the hedge fund universe in recent years has been dominated by concerns over the performance of the asset class. However, 2017 has been a story of resurgence for the industry, as three more positive months of performance in the third quarter of the year have driven the Preqin All-Strategies Hedge Fund benchmark to 8.20%, surpassing the already improved annual return seen in 2016 (+7.58%) with time to spare.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

With the last negative monthly return seen in October 2016, managers are taking steps in reversing some of the negative opinions that investors hold towards hedge funds or, more simply: as the performance of the asset class improves, so does investor sentiment.

In Preqin’s June 2017 interviews of institutional investors active in hedge funds, nearly half (45%) of respondents reported that their hedge fund investments had either met or exceeded their expectations over the past 12 months. Put into context, this represents an improvement of 11 percentage points since our December 2016 survey and a significant 24 percentage-point increase from Preqin’s June 2016 interviews, highlighting how this run of positive returns (hedge funds have been in the black in 18 of the last 19 months) has been welcomed by the investor community.

Continuing the trend seen in Preqin’s Q2 2017 Quarterly Update, hedge funds being brought to market in 2017 are more geographically specialized than in previous years. Funds operating a global investment mandate account for just 42% of all launches in Q3 2017, the smallest proportion that globally focused funds have represented in the past four quarters.

We hope you find this report useful and welcome any feedback you may have. For more information, please visit www.preqin.com or contact [email protected]

Performance Update

Hedge funds continued a strong 2017 in the third quarter of the year with the Preqin All-Strategies Hedge Fund benchmark returning 3.18% (Fig. 1). These positive returns have driven the benchmark’s 2017 year-to-date return to 8.20% as at September 2017, the highest return at this stage of the year since 2013. In addition, three more months of positive returns have allowed hedge funds to extend their positive streak to eleven months.

All leading hedge fund strategies made gains in Q3, with equity strategies the top performers (+4.15%, Fig. 3). Event driven strategies closely followed, with a return of 3.31% predominately driven by gains made in September of 2.11%, the highest of any top-level strategy for the month. Macro strategies funds experienced a reversal of fortune in Q3, generating a return of 1.33% and reversing the losses made in the second quarter of 2017, while CTAs posted another relatively neutral quarter.

Following a strong H1 2017, emerging markets-focused funds made the greatest gains in Q3 of any top-level region (+5.30%), significantly outperforming funds focused on developed markets (+2.17%, Fig. 4). Asia-Pacific-focused funds also enjoyed success over Q3 2017, making gains of 4.33% and bringing the 2017 YTD return to 12.78%, just behind the top performing region of the year so far (emerging markets, +12.87%). Gains were also seen across other top-level regions tracked by Preqin, with North America and Europe generating returns of 2.43% and 1.96% respectively.

Performance Benchmarks

Largest Fund Managers

Fund Launches

Preqin’s Hedge Fund Online features 53 hedge fund launches in Q3 2017. Single-manager hedge funds continue to represent the majority of launches, accounting for 84% of funds incepted (Fig. 8). UCITS vehicles represent 13%, while the proportion of CTAs launched in the quarter has decreased by 12 percentage points from Q2 2017, representing just 3% of all launches.

Unsurprisingly, North America-based hedge funds continued to dominate launch activity, constituting 61% of fund launches in Q3 2017 (Fig. 9). However, this proportion has decreased by 10 percentage points from the previous quarter, following a slowdown in launch activity in the industry’s largest market. The European hedge fund industry continues to show signs of growth, making up a significant proportion (21%) of launches in Q3. This follows on from the region’s positive asset inflows of $13bn in the second quarter of the year, the largest amount across all regions
in Q2.

The greatest proportion (42%) of hedge funds launched in Q3 2017 focus on global opportunities (Fig. 10). However, this is a significantly lower share of launches than recorded in the preceding quarters, as more funds being brought to market look to specifically target investment in North America.

Equity strategies remain the most prevalent strategy utilized by hedge funds; however, the proportion of newly launched multistrategy funds has significantly increased from Q2 2017 (Fig. 11). The third quarter also saw an increase in the proportion of hedge fund launches utilizing macro and relative value strategies. According to the Preqin Investor Outlook: Alternative Assets, H2 2017, macro and relative value strategies are the leading top-level strategies investors plan to allocate to in the next 12 months: 31% and 33% of investors surveyed intend to increase their allocations to these strategies respectively.

Article by Preqin, via Capitalize for Kids

See the full PDF below.