Research

2017 Key Trends in Global Funds of Hedge Funds

Introduction

The global funds of hedge funds industry ended annual year 2016 with dampened investor enthusiasm with redemptions totalling US$46.4 billion for the year. Multi-managers’ performance took a slight beating over the past year, with the Eurekahedge Fund of Funds Index declining 0.12%, underperforming their hedge fund and long-only counterparts which gained 4.50% and 7.65% respectively. Going into 2017, multi-managers have posted impressive gains for Q1 2017, up 2.05% while single and long-only managers gained 2.35% and 6.65% over the same period respectively.

While investor interest into the funds of hedge funds industry has been anaemic, performance-based figures have been positive in recent years. The funds of hedge funds industry has seen four consecutive years of positive performance-based gains from 2012 to 2015 despite the challenge of strong redemptions over the same period. 2016 marked the first year since 2012 whereby performance-based figures languished into negative territory, although a modest US$0.6 billion decline.

Figure 1a: Global funds of hedge funds industry

  Global funds of hedge fund industry

The funds of hedge funds sector grew at an accelerated pace between 2002 and mid-2008, increasing the size of the industry from less than US$100 billion to the industry’s record high of US$826.2 billion in March 2008. This growth in assets was accompanied by a simultaneous increase in the fund population, with the total number of fund of hedge funds increasing from below 1,500 to nearly 3,700. The advent of the global financial crisis reversed this trend, with assets under management (AUM) of the industry taking a sharp turn for the worse after steep losses and heavy redemption pressure from investors, causing a number of multi-managers to close shop in a difficult market environment.

Following the turbulent times of 2008 and early 2009, funds of hedge funds witnessed a recovery of sorts in the latter half of 2009, with most of the gains coming from performance. However, this proved to be short-lived as investors grew sceptical about the value proposition of the multi-manager model and AUM stagnated.

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