News & Events

Hedge Fund Round Up 2017

Early estimates put the Eurekahedge Hedge Fund Index return at 7.81% by the end of 2017, and hedge funds are on track to post twelve consecutive positive months in a year for the first time since 1999. Below are the key highlights in the hedge fund industry for the year:

  • Hedge funds attracted US$94.7 billion investor allocations in 2017, in contrast to the US$55.1 billion redemption last year.
  • Billion dollar hedge funds continued to dominate the bulk of investor allocations this year with US$52.6 billion inflows.
  • Overcrowding in the European hedge fund industry resulted in the highest turnover rate as indicated by the 94 net decline in the hedge fund population within the region, which is significantly higher than in the other geographic mandates.
  • The contraction of the global hedge fund industry has started to slow down over the past three years with 839 closures in 2015, 769 in 2016 and finally 555 in 2017. Over the same period, the percentage of hedge funds that underperform relative to their high water mark has been seeing a trend of decline.
  • Hedge fund management fees continued to struggle under strong pressure, with the average management fees among hedge funds that launched in 2017 standing at 1.26%. Furthermore, only around 14% of the funds that launched this year charged the typical 2% management fees.
  • Asian hedge funds outperformed their global peers with their 15.89% returns over 2017 thanks to the exceptional performance delivered by fund managers focusing on China and India.
  • Amidst strategic mandates, equity long-bias hedge funds secured the top spot in terms of performance as they benefit from the global equity market rallies with their 15.32% gains over the year. On the other end, equity short-bias hedge funds ended up in the last place with 17.37% losses.

Figure 1: Investor allocations turned positive in 2017
Investor allocations turned positive in 2017

Compared to the massive redemptions seen in 2016, net investor flows were positive across all investing regions, indicating restored investor confidence in hedge funds. The year-to-date inflows for 2017 stood at US$94.7 billion, the greatest yearly inflows the industry has seen since 2013.

Figure 2: Investor allocations in 2017 favour long short equity hedge funds
Investor allocations in 2017 favour long short equity hedge funds

As of 2017 year-to-date, long short equities hedge funds saw the largest investor allocations at US$23.5 billion, followed by arbitrage hedge funds with US$16.8 billion inflows. On the other end of the spectrum, distressed debt hedge funds saw US$2.0 billion redemption over the same period. The last quarter of 2017 has been a relatively volatile period for the high yield bond market thanks to tax reform concerns and weak earnings in several sectors.

Figure 3: Billion dollar funds attract the bulk of capital inflows
Billion dollar funds attract the bulk of capital inflows

Billion dollar hedge funds which comprised just shy of 3% of the hedge fund industry population globally took the largest portion of the investor inflows in 2017. Investor allocations were positive across all fund sizes, with US$52.6 billion allocated toward hedge funds managing US$1 billion or more in assets in 2017. Tightening regulations across the industry has contributed to the formation of an environment favouring larger hedge funds in terms of survivability. As regulatory bodies have grown increasingly demanding, the cost of maintaining and ensuring compliance has crept higher. Under MiFID II, which will take effect in just two weeks, small hedge funds might have to cut their research budget or pass the cost onto their investors at the risk of losing business.

Figure 4: Culling continues in the crowded European hedge fund industry
Culling continues in the crowded European hedge fund industry

Amidst the global trend of declining hedge fund population, Europe has topped the charts for three consecutive years when it comes to fund liquidations exceeding new start-up activity. In 2017 alone, Europe saw 137 launches and 231 liquidations. European hedge funds also tend to have shorter lifespans compared to their peers from other regions. As of 2017, half of dead European funds liquidated within four years after their launches, making Europe the region with the highest turnover rate within the global hedge fund industry.

Figure 5: CTA/managed futures funds made a comeback
CTA/managed futures funds made a comeback

Net population growth of CTA/managed futures hedge funds turned positive in 2017 for the first time since 2011. Increasing commodity prices and improving performance of CTA/managed futures funds, supported by FX and precious metals might have helped boosting investor interest over this strategy. Furthermore the trend towards quant, machine learning and artificial intelligence based hedge fund strategies have also renewed the interest in the next generation of systematic strategies that are often employed by CTA/managed futures funds. On the other hand, long short equities hedge funds continued to see the sharpest decline for two consecutive years which can be attributed to their population size.

Figure 6: Hedge fund attrition rate slowing down
Hedge fund attrition rate slowing down

Starting from the end of 2015, the percentage of hedge funds that are below their perpetual high water mark (HWM) has been seeing a trend of decline. Supported by the market rallies in the global equity markets, hedge funds have posted good returns in 2017, as indicated by the Eurekahedge Hedge Fund Index which generated 7.27% year-to-date returns, and is on track to post twelve consecutive positive months in a year for the first time since 1999. The number of funds closing annually has dropped to 555 this year, which is the lowest since the 2008 crisis, indicating that the decline in hedge fund population is slowing down even though closures still outpaced launches over 2017.

Tables 1a-b: Pressure on management fees remains strong in 2017

Table 1a: Average global hedge fund fees by launch year

Table 1b: AUM-weighted average hedge fund fees by launch year

Year

Performance Fees (%)

Management Fees (%)

2007

18.78

1.68

2008

18.22

1.59

2009

17.75

1.58

2010

17.87

1.56

2011

17.98

1.56

2012

17.06

1.51

2013

17.00

1.44

2014

16.78

1.47

2015

15.24

1.42

2016

16.52

1.41

2017

17.11

1.26

Year

Performance Fees (%)

Management Fees (%)

2007

9.69

1.33

2008

9.61

1.28

2009

9.27

1.33

2010

10.30

1.23

2011

8.87

1.22

2012

7.34

1.20

2013

7.32

1.17

2014

7.67

1.27

2015

7.48

1.07

2016

6.67

1.00

2017

5.00

0.92

Globally, the average performance fees charged by hedge funds that launched in 2017 stood at 17.11%, up from last year’s 16.52% figure and is the highest since 2011. On the other hand, average management fees has declined to 1.26% this year. Funds of hedge funds tend to charge lower fees than hedge funds because of their double fee structure as they invest in hedge funds. However, they are not exempted from the scrutiny on their fee structure. As seen from the tables, average fund of hedge fund fees have declined over the past few years.

The figures shown in the table 1a are considerably lower than the traditional “2-20” fee structure often associated with hedge funds. Increasing competition both from within the hedge fund industry and from other cheaper alternative investment products, combined with the lacklustre performance of hedge funds relative to their pre-2008 crisis performance might have contributed to this pressure on fees. Roughly 42% of the hedge funds that launched in 2017 charge 20% performance fee, but only around 14% charge 2% management fee, indicating the stronger pressure on management fees compared to performance fees.

Table 2: Asian hedge funds rebound on the back of China and India’s performance

Eurekahedge Index Name

2017 Return (%)

2016 Return (%)

Eurekahedge Hedge Fund Index

7.27

4.59

Eurekahedge North American Hedge Fund Index

5.66

7.84

Eurekahedge European Hedge Fund Index

6.57

0.22

Eurekahedge Asian Hedge Fund Index

15.89

0.51

Eurekahedge Asia ex Japan Hedge Fund Index

19.89

-0.38

Eurekahedge Japan Hedge Fund Index

12.24

1.72

Eurekahedge Greater China Hedge Fund Index

28.27

-4.47

Eurekahedge India Hedge Fund index

27.74

3.85

Eurekahedge Korea Hedge Fund Index

15.41

-8.32

Eurekahedge Australia/New Zealand Hedge Fund Index

6.07

1.26

Eurekahedge Latin American Hedge Fund Index

12.24

18.07

Eurekahedge Latin American Onshore Hedge Fund Index

13.12

19.25

Eurekahedge Latin American Offshore Hedge Fund Index

9.43

14.19

Source: Eurekahedge

Asian hedge funds managed to gain 15.89% over 2017, leaping ahead of their peers from other regions after showing mediocre performance last year, by virtue of strong performance in China and India’s equity markets over 2017. Despite being overshadowed by China and India, Korea’s market also performed well, owing to strong exports in semiconductors. Latin American hedge funds maintained their double digit returns, despite falling behind their 2016 performance supported by onshore fund managers who continued to outperform their offshore competition. Strong recovery in European equity markets have contributed to the European hedge funds’ performance this year, even though they are still behind their peers from Asia and Latin America.

Figure 7: Crypto-currency funds continue to defy gravity
Crypto-currency funds continue to defy gravity

The Eurekahedge Crypto-Currency Hedge Fund Index continued to surge over the last few months of 2017, propelled by the soaring price of Bitcoin and other crypto-currencies traded by these hedge funds. With 204.79% annualised volatility since June 2013, crypto-currency hedge funds ranked among the top most volatile hedge fund strategies tracked by the Eurekahedge indices. It remains to be seen whether the recently launched CBOE and CME Bitcoin futures would put a leash on the crypto-currency’s volatility.

 

Table 3: Key performance statistics vs Eurekahedge Crypto-Currency Hedge Fund Index

Key Performance Statistics

Eurekahedge Crypto-Currency Hedge Fund Index

Annualised returns since launch

191.82%

Annualised volatility

204.79%

Sharpe Ratio (2% RFR)

0.93

Returns since launch

10263.76%

Source: Eurekahedge

Table 4: Strategy Return Map
Strategy Return Map

 

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