Research

2018 Key Trends in Long-Only Absolute Return Funds

Introduction

Absolute return funds ended the year 2017 with an impressive gain of 20.44%, beating their hedge fund and fund of hedge fund peers which returned 8.19% and 7.18% respectively, by riding on the global equity market rally which propelled the MSCI AC World IMI Index (Local) to rise 17.51% throughout the year. However, market volatilities struck back in the first half of 2018, and absolute return fund managers were down 0.39% as of May 2018 year-to-date, trailing behind hedge fund managers who returned 0.39% over the same period, owing to the downside protection provided by their hedging strategies.

Strong performance-based growth and net investor flows in 2017 pushed the total assets of the global absolute return fund industry by US$54.4 billion, which is a 23% year-on-year growth from its end of 2016 total assets, a figure the industry hasn’t seen since the recovery period following the global financial crisis. As of May 2018, the absolute return industry size stood at US$286.8 billion, collectively managed by 782 funds.

Figure 1: Industry growth over the years
 Long-only absolute return hedge fund industry growth

Over the past years, the absolute return hedge fund industry weathered through multiple financial and economic storms with periods prior to the 2008 global financial crisis seeing much optimism in both asset population growths. In 2006, assets under management (AUM) for the industry stood at US$156.0 billion overseen by 344 funds and by the end of 2007, AUM has reached a high of US$190.2 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 42.30% during the year. Performance-driven losses account for the bulk of asset contraction with losses of US$65.1 billion. Steep investor redemptions of US$18.6 billion were also recorded over the year.

The performance of long-only absolute return funds rebounded in 2009, gaining 51.79%, thanks to the rebound in global equity markets post-crisis. Managers posted performance-based gains of US$43.3 billion with investor inflows of US$13.3 billion for the year. At the end of 2009, AUM for the long-only absolute return funds industry reached US$163.1 billion, up roughly 53% from the end of 2008. Equity markets fell into negative territory in 2011 on the back of the Eurozone crisis, with long-only absolute return managers declining 13.5% over the same period. The performance of long-only absolute return hedge funds were in positive territory between 2012 and 2014, with an increase in AUM attributed mostly to performance-based gains. Asset base contracted in 2015, as the industry braced investor redemptions. At the end of 2016, AUM for the industry grew a modest US$3.5 billion thanks to performance-based growth compensating for the trend of investor redemptions.

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