Research

2016 Overview: Key Trends in Long-Only Absolute Return Funds

Introduction

Absolute return funds have had an impressive year in 2016, gaining 7.61%, well ahead of underlying markets and hedge fund peers which were up 7.33% and 4.46% over the same period respectively. Major global equity markets have ended the year in positive territory, supporting the performance of absolute return managers. Among regional mandates, North American absolute return managers topped the table in 2016, gaining 13.70% followed by their emerging markets mandated absolute return peers which gained 9.41% over the same period. Across strategic mandates, value-investing managers gained 13.16% followed by bottom-up investing managers with gains of 8.00% for the year.

In terms of regional capital flows, Asia Pacific1 mandated absolute return managers attract the bulk of assets within the absolute return sphere, around 43% of the industry’s current total assets under management (AUM) or US$96.5 billion, with majority of assets concentrated into Asia Pacific ex-Japan focused funds. Given the restrictions on short-selling in the Asia Pacific market, long-only absolute returns strategies have been popular in the region. Investing styles of absolute return funds also differ such that managers actively scout for underfollowed and undervalued companies with considerations such as high-yielding dividends, sound corporate governance or companies whose intrinsic values are greater than the current trading range. The global absolute return funds industry currently oversees US$225.9 billion in assets, managed by a total of 796 funds.

Figure 1a: Industry growth over the years

  Industry growth over the years

 

Over the past 10 years, the absolute return hedge fund industry weathered through multiple financial and economic storms with the periods prior to the 2008 global financial crisis seeing much optimism in both asset growth and the number of funds. In 2006, AUM for the industry stood at US$155.97 billion overseen by 344 funds and by end of 2007, AUM has reached a high of US$190.16 billion, with asset growth attributed to almost equal strength in performance-based gains and net investor inflows. The industry was hard-hit during the global financial crisis of 2008, with the Eurekahedge Long-Only Absolute Return Fund Index declining 42.44% during the year. Performance-based losses account for the bulk of asset contraction with losses of US$65.11 billion. Steep investor redemptions of US$18.60 billion were also recorded over the year.

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Footnote
1Inclusive of Japan mandated long-only absolute return funds
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