Research

2016 Key Trends in North American Hedge Funds

Introduction

The US$1.49 trillion North American hedge fund industry has been resilient amid challenging market conditions, with the trading environment over the course of the year being a rather exciting albeit nerve-wrecking one so far. The industry’s assets under management (AUM) grew by US$19.1 billion during the year largely on the back of performance-driven gains (US$14.3 billion). Investor inflows were somewhat lacklustre this year with US$4.8 billion of allocations to date, down from inflows of US$40.5 billion over the same period in 2015. The Eurekahedge North American Hedge Fund Index was up 4.61% over the past eight months in 2016, outperforming its global peers, as represented by the Eurekahedge Hedge Fund Index which gained 2.83% over the same period. Event driven mandated hedge funds led performance across strategic mandates, up 11.82% followed by distressed debt hedge funds which were up 7.50%. Relative value mandated North American hedge funds also posted impressive returns, gaining 7.29% year-to-date as trading conditions especially in the days leading to Brexit favoured managers who were pursuing opportunistic volatility strategies.1 In terms of regional exposure, North American managers with exposure into emerging markets led performance with gains of 6.08% as investor appetite into risky assets recovered as oil prices showed some hints of stabilization. While 2016 has been a ‘trading frenzy’, North American hedge fund managers have stood their ground, with respectable returns even though investor inflows had not much gusto when compared to inflows over the same period in 2015. The final quarter of 2016 is likely to be an eventful end with the US Presidential Elections and the Fed rate hike in focus.

Figure 1a: Industry growth over the years

  North American hedge fund industry growth 2000 to August 2016

The pre-financial crisis period witnessed unprecedented growth in the North American hedge fund industry with AUM growth from US$275 billion in 2000 to reach its peak at US$1.19 trillion in 2007. However, this period of growth was interrupted by the global financial crisis in 2008 with AUM declining close to 20% from its 2007 high. Investors redeemed US$94.2 billion in 2008 alone with five consecutive months of outflows ending December 2008. Unnerved investors continued to redeem their capital going into 2009 with a four-month uninterrupted outflows of US$135.8 billion in the period ending April 2009. With governments stepping in to salvage a marred global economy, investor panic somewhat abated in the following months. However, the intensity of the redemptions in the first four months of 2009 left an indelible mark on the North American hedge fund industry for the rest of the year, with investors redeeming a total of US$100.7 billion for 2009 annual year, despite an impressive US$88.5 billion in performance-driven gains in the same year.

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