Research

2015 Key Trends in North American Hedge Funds

Introduction

The North American hedge fund industry grew by US$54.2 billion as of 2015 year-to-date, on the back of strong investor inflows which account for roughly two-thirds of total asset growth in the region. Despite mixed economic performance in the US during the year, investor inflows stood at US$34.5 billion while performance-driven gains stood at US$19.8 billion year-to-date, bringing the total assets under management (AUM) of the North American hedge fund industry to US$1.48 trillion managed by 5,432 hedge funds as of August 2015.

At the start of the new millennium the industry witnessed strong growth with AUM growing from US$275 billion in 2000 to reach US$1.19 trillion in 2007. However, the financial crisis resulted in heavy redemptions as investors grew cautious due to market uncertainty with AUM declining almost 20% from its 2007 peak to US$963 billion by 2009. Launch activity was also muted during crisis years as well, matched with steep liquidations resulting in a stagnation of the industry’s size.

Figure 1a: Industry growth over the years
 

As global economies recovered from the financial crisis, investor appetite for risk was restored and the industry AUM recovered from 2010 onwards largely on the back of strong investor inflows. In 2010 and 2011, asset inflows of US$116.6 billion into the industry were recorded despite increased risk aversion in the markets towards the end of 2011 as the Eurozone crisis took centre stage. As a result, investor inflows slowed down to US$6.7 billion in 2012 due to investor nervousness. During the bull market run of 2013 and 2014, investor inflows picked up as market rallies have resulted in inflows totaling US$82.0 billion in the two years. Well into the second quarter of 2015, funds with exposure to the equity markets posted good gains as the market rally trend continued. However, this was short-lived as global equity markets witnessed continued sell-offs from the ripple effects of the Chinese stock market crash in the second quarter of 2015.

While the strong growth in fund population and in the industry’s AUM akin to the early 2000s is no longer seen in recent times as hedge funds are faced with operational, regulatory and market challenges, hedge funds continue to be relevant as an alternative investment vehicle for its ability to capture much of the upside while simultaneously posting lower volatilities compared to the markets. Despite the recent equity market sell-off, North American hedge funds are able to comfortably outperform underlying markets. The Eurekahedge North American Hedge Fund Index was down 2.21% while underlying markets as represented by the MSCI North America IMI1 Index were down 6.13% in August 2015.

 

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Footnote

1MSCI North America IMI (Local)

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