Research

2018 Key Trends in Global Funds of Hedge Funds

Introduction

Total assets managed by funds of hedge funds managers around the globe stood at US$397.5 billion as of April 2018. This continued the trend of contraction which has persisted since the end of 2010 despite the strong performance of multi-manager funds in 2017, as indicated by the 7.19% gain posted by the Eurekahedge Fund of Funds Index. The industry saw 24 launches and 193 closures last year, marking 2017 as the seventh consecutive year of population decline. Investor interest in the fund of hedge funds remained unsubstantial, with net redemptions and fund liquidations persisting as the recurring themes of the industry.

Despite the volatile market situations and concerns regarding a potential trade war between the world’s two strongest economies which plagued the beginning of 2018, funds of hedge funds managers have managed to provide some downside protection for their investors, gaining 0.46% as of April 2018 year-to-date, outperforming the global equity markets represented by the MSCI AC World IMI Index which slipped 0.63% over the first four months of the year. Macro fund managers outperformed their peers utilising other strategies and topped the chart with 1.67% gain as of April 2018 year-to-date, while among regional mandates, managers focusing toward emerging markets yielded the best performance, gaining 0.85% over the same period.

Figure 1: Industry growth over the years
 Global fund of hedge fund industry growth

The fund 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 funds 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 remained sceptical about the value proposition of the multi-manager model and the industry AUM slowly but surely declined over the years.

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