Economics

Hedge Fund Performance Fees UP!! In 2017, But Down Again In 2018

Key highlights for 2018:

  • Hedge funds declined 1.62% in February and were up 0.37% year-to-date with total AUM growth still in the green despite losses in February which eroded the solid gains in January. Investor redemptions stood at US$5.0 billion in February while performance-based losses of US$34.2 billion were recorded. Almost 35% of the fund managers are in the red for the year in what is turning out to be the toughest start to the year for fund managers since 2016.
  • While hedge fund capital allocations were in the red for the month of February, investor subscriptions have favoured CTA/managed futures and event driven strategies which have seen inflows of US$0.8 billion each followed by long/short equities and arbitrage strategies with inflows of US$0.4 billion each.
  • Hedge funds managing in excess of US$1 billion reported their highest monthly performance-based decline on record, totalling US$25.5 billion while net outflows of US$4.6 billion were recorded. In contrast, sub-billion dollar hedge funds have fared relatively better with outflows of US$0.3 billion and performance-based losses of US$8.6 billion. The Eurekahedge Billion Dollar Hedge Fund Index was down 1.77% in February, its steepest monthly loss on record since the infamous May 2010 flash crash when the index lost 2.01%.
  • The US$264.3 billion CTA/managed futures mandated hedge funds reported their biggest monthly performance-based losses since June 2004, totalling US$19.4 billion in February bringing their 2018 year-to-date performance-based figures down to the red, with losses totalling US$9.2 billion.  Meanwhile, investors allocated US$0.8 billion into the mandate during the month and US$3.9 billion year-to-date.
  • The US$1.66 trillion North American hedge fund industry posted the steepest performance-based losses of US$25.9 billion among regional mandates during the month while investor redemptions of US$1.1 billion were recorded.  Asset base for the North American hedge fund industry grew by US$23.5 billion over the year with most of this growth attributed to net investor inflows of US$18.2 billion year-to-date, while performance-based gains totalling US$5.3 billion were recorded over the same period.
  • Asia ex-Japan mandated hedge funds posted the steepest decline among regional mandates during the month, down 2.30% with underlying Greater China and Indian hedge fund managers losing 3.49% and 1.76% respectively.  Performance-based losses of US$1.8 billion were recorded while investors redeemed US$0.8 billion from the mandate during the month.
  • The average performance fee charged by North American hedge funds jumped to 18.49% in 2017 from 17.60% in 2016, before dropping to a historic low of 14.17% as of January 2018. Currently, the average management fee charged by North American hedge funds stands at 1.38%. For more details, please refer to the 2017 Overview: Key Trends in North American Hedge Funds report.
  • The Eurekahedge Crypto-Currency Hedge Fund Index declined 16.83% in February, bringing its year-to-date losses to 22.47%, barely ahead of the price of bitcoin which declined 26% in the first two months of 2018.

2018 Key Trends in North American Hedge Funds

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Global markets underwent a sharp and speedy correction in February which saw equity markets post steep losses as investors prepared for a faster than expected interest rate hike in the US. The average return of the global hedge fund industry was pulled into negative territory as markets experienced sharp reversals, with trend following CTA/managed futures and long/short equities strategies lagging behind the pack. Hedge funds registered their first monthly loss of the year with the Eurekahedge Hedge Fund Index down 1.62% in February as volatility levels spiked across the board and unravelled the volatility risk premium trade. Despite steep losses during the month, hedge funds have protected on the downside and managed to outperform underlying markets as the MSCI AC World Index (Local) declined 3.68% in February.

Returns were largely negative across the board with all key regional mandates in the red during the month, with Asia ex-Japan mandated funds delivering the worst returns, down 2.30% followed by North American and Japanese mandated hedge funds with losses of 1.23% and 1.14% respectively. Among strategies, distressed debt hedge funds posted the best gain, up 1.32% (largely due to idiosyncratic factors – exposure to Puerto Rican debt) while CTA/managed futures posted the steepest loss, down 4.35%.

Trading conditions are likely to remain choppy for the rest of the year with VIX levels still elevated from their all-time lows. While the market consensus appears to be favouring an aggressive rate hiking cycle in the US and an overall tapering in global liquidity conditions as the Fed and ECB normalise interest rate policy, it is perhaps too soon to write off the doves in the US Fed. Headwinds to global growth from a trade war, as well as tariffs feeding into the US inflationary cycle in an adverse way would make it much more difficult for the Fed to normalise policy without rocking the boat too much – and by most counts, February was just the teaser.

February 2018 and January 2018 returns across regions

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Performance across regional mandates was mixed during the month with Asia leading much of the weakness – Asia ex-Japan managers were down 2.30% with Greater China focused hedge funds down 3.49% while Indian mandated hedge funds lost 1.76% over the same period. Japanese managers have also posted losses, down 1.14% during the month, with the Nikkei 225 ending the month in the red – losing 4.46%. North American and European hedge funds also showed some slack, with losses of 1.23% and 0.78% respectively during the month while beating the MSCI North American AC Index (Local) and the MSCI Europe Index which fell 3.88% and 3.47% respectively in February. On the other hand, Latin American hedge funds lead the tables with gains of 0.66%, as managers’ performance was propped up by the strength in underlying equity markets in Latin America particularly in Brazil as its central bank cuts interest rates again.

On a year-to-date basis, Latin American hedge fund managers gained 4.37% followed by Asia ex-Japan hedge fund managers which were up 1.11%. European hedge funds managers were up 0.53% followed by Japanese and North American managers with gains of 0.36% and 0.30% respectively.

2018 year-to-date returns across regions

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Mizuho-Eurekahedge Asset Weighted Index

The asset weighted Mizuho-Eurekahedge Index declined 2.61% in February. It should also be noted that the Mizuho-Eurekahedge Index is US dollar denominated, and during months of strong US dollar gains, the index results include the currency conversion loss for funds that are denominated in other currencies. The US Dollar Index gained 1.70% in February.

Performance was negative among the suite of Mizuho-Eurekahedge Indices with the Mizuho-Eurekahedge Top 100 Index posting the steepest decline, down 2.55% during the month. This is followed by the Mizuho-Eurekahedge Asia Pacific Index and the Mizuho-Eurekahedge Long/Short Equities Index declining 2.33% and 2.23% respectively. The Mizuho-Eurekahedge Multi-Strategy Index was down 1.97% this month, followed by the Mizuho-Eurekahedge Emerging Markets Index which declined 1.35% over the same period. As of 2018 year-to-date, the Mizuho-Eurekahedge Emerging Markets Index led the tables with gains of 2.49% followed by the Mizuho-Eurekahedge Long/Short Equities Index which was up 1.19%. On the other hand, the Mizuho-Eurekahedge Top 100 Index performed poorly, posted losses of 0.09% over the same period. The USD Index was down 1.64% as of 2018 year-to-date.

Mizuho-Eurekahedge Indices

February 2018 returns

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Mizuho-Eurekahedge Indices

2018 year-to-date returns

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CBOE Eurekahedge Volatility Indexes

The CBOE Eurekahedge Volatility Indexes comprise four equally-weighted volatility indices – long volatility, short volatility, relative value and tail risk. The CBOE Eurekahedge Long Volatility Index is designed to track the performance of underlying hedge fund managers who take a net long view on implied volatility with a goal of positive absolute return. In contrast, the CBOE Eurekahedge Short Volatility Index tracks the performance of underlying hedge fund managers who take a net short view on implied volatility with a goal of positive absolute return. This strategy often involves the selling of options to take advantage of the discrepancies in current implied volatility versus expectations of subsequent implied or realised volatility. The CBOE Eurekahedge Relative Value Volatility Index on the other hand measures the performance of underlying hedge fund managers that trade relative value or opportunistic volatility strategies. Managers utilising this strategy can pursue long, short or neutral views on volatility with a goal of positive absolute return. Meanwhile, the CBOE Eurekahedge Tail Risk Index tracks the performance of underlying hedge fund managers that specifically seek to achieve capital appreciation during periods of extreme market stress.

CBOE Eurekahedge Volatility Indexes

February 2018 returns

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CBOE Eurekahedge Volatility Indexes

2018 year-to-date returns

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Summary monthly asset flow data since January 2013

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Eurekahedge

Launched in 2001, Eurekahedge has a proven track record spanning over 16 years as the world’s largest independent data provider and alternative research firm specialising in global hedge fund databases and research. Headquartered in Singapore with offices in New York and Philippines, the global expertise of our research team constantly adapts to industry changes and needs, allowing Eurekahedge to develop and offer a wide array of products and services coveted by institutional investors, family offices, accredited investors, qualified purchasers, financial institutions and media sources. In addition to market-leading hedge fund databases, Eurekahedge’s other business functions include hedge fund research publications, due diligence services, investor services, analytical platforms and risk management tools.

Article by Eurekahedge