Research

2015 Overview: Key Trends in North American Hedge Funds

Introduction

The North American hedge fund industry continues to grow despite muted returns in 2015 when a challenging market environment saw underlying managers post sub-zero returns in what was the worst year for managers since the lows of 2008. However, not all was doom and gloom. North American managers running Asia Pacific, broad emerging market and European mandates ended 2015 in the green, while across strategic mandates arbitrage strategies; in particular managers employing volatility based strategies posted good returns. The Eurekahedge North American Hedge Fund Index was down 0.65% in 2015 with total assets under management (AUM) growing by US$51.7 billion during the year largely on the back of investor allocations which represented close to three-quarters of the total gain in assets. Investor allocation activity for the North American hedge fund industry in 2015 was roughly twice the level seen the year before, which indicates strong demand for the region’s hedge funds despite the challenging market environment. To put this in context, performance-driven gains were lacklustre for the industry in 2015 seeing modest gains of US$14.4 billion, compared to US$60.4 billion over the same period the year before. As of January 2016 year-to-date, the region’s AUM currently stands at US$1.48 trillion, overseen by 5,522 hedge funds.

Over the past year, North American hedge funds with a dedicated Asia Pacific mandate saw the best gains up 4.76% while those with a global focus saw the steepest decline with losses of 0.88%. At the start of 2016, performance was in the red across all geographic mandates, with Asia Pacific focused funds down 4.41%, followed by those with European focus which were down 3.31%. Across strategic mandates, arbitrage funds ended the year on a positive note, up 4.17%, followed by macro and CTA/managed futures mandated hedge funds with gains of 3.61% and 0.62% respectively. Among underperformers, distressed debt focused funds posted the steepest loss, down 12.35% - the worst performing strategy among all strategic mandates in 2015. All strategic mandates were in the red at the start of the year with the exception of CTA/managed futures hedge funds which were marginally positive at 0.09% as of January 2016 year-to-date.

Figure 1a: Industry growth over the years
 

Looking back over the years, the industry witnessed unprecedented growth in the pre-financial crisis period with AUM growing from US$275 billion in 2000 to reach US$1.19 trillion in 2007. However, market uncertainty brought about by the global financial crisis resulted in heavy redemptions as investor redemptions spiked with AUM declining almost 20% from its 2007 peak to US$963 billion by 2009. The industry’s fund population also stagnated during this period as steep liquidations caught up with slow launch activity. 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 following investor nervousness and modest gains posted by hedge funds in the preceding year.

 

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