Key Trends in Global Hedge Funds (November 2021)

The Eurekahedge European Hedge Fund Index was up 8.15% year-to-date as of September 2021, trailing the underlying global equity market as represented by the MSCI ACWI IMI, which was up 11.99% over the same period. 2020 was a very challenging year for global hedge funds as economic and market conditions were particularly dire. Global equities took a huge beating, particularly in March 2020 when the World Health Organisation declared COVID-19 a global pandemic. The MSCI ACWI IMI declined a staggering 13.99% in March 2020, negatively impacting the performance of global hedge funds as they lost 6.48% during the month. Supported by the Federal Reserve’s emergency move in March 2020 to cut benchmark interest rates to zero and restart quantitative easing, the global equity markets managed to stage a strong rebound from the March 2020 bottom, supporting the performance of global hedge funds over the subsequent nine months. Global hedge funds managed to return 22.15% during the April 2020 to December 2020 period, allowing them to recoup all losses suffered in Q1 2020 and end the year on a positive note with a double-digit return of 12.80%. Moving into 2021, global hedge funds have managed to sustain the positive momentum with the Eurekahedge European Hedge Fund Index generating seven months of positive returns, except for July and September when hedge funds declined 0.37% and 0.64% respectively. The combination of strong fiscal support, accommodative monetary policy and high COVID-19 vaccination rates has enabled the gradual reopening of economies and strengthened the momentum of the global economic recovery. This led to a boost in investor risk-on sentiment which supported the performance of global equity markets and benefitted global hedge funds.

Meanwhile, concerns over rising inflation began to pose increasing headwinds to the economic recovery and dampened investor sentiment. The developing energy crisis in Europe and China, supply chain bottlenecks and the decision of the OPEC+ to keep the supplies of oil tight led to a surge in energy, Brent crude oil and West Texas Intermediate crude oil prices of 11.60%, 9.52% and 9.91% in September respectively. The Federal Reserve raised its inflation forecast for the year to 4.2%, up from the previous estimate of 3.4% and announced plans to begin tapering of quantitative easing in November 2021. Against this backdrop, the 10-year US Treasury gained 19bp in September, the most since March 2021. The heightened risk aversion led to sharp declines in major US equity indices, with the NASDAQ, S&P500 and DJIA down 5.31%, 4.76% and 4.29% in September respectively. Over in Europe, returns were negative among equity benchmarks in the region with the DAX, Euro Stoxx 50 and CAC 40 down 3.63%, 3.53% and 2.40% respectively. Market risk-on sentiment was dampened by the ongoing energy crisis and the political uncertainty post-Germany elections. Despite the challenges in Europe, the European Central Bank has projected real GDP to return to pre-crisis levels again by the end of 2021 and economic growth to remain strong in 2022. The pace of net asset purchases under the pandemic emergency purchase programme will also be calibrated at a moderately lower pace in the fourth quarter than in the previous two quarters.

Figure 1: Global Hedge Fund Industry Map

The industry’s total assets under management increased by US$170.4 billion in the first nine months of 2021, driven by performance-based gains of US$89.5 billion and net investor inflows of US$80.9 billion. The global hedge fund industry had witnessed a staggering US$91.5 billion of net investor outflows in 2020, driven mainly by the US$81.0 billion net investor outflow in March 2020. Having said that, the industry has shown signs of recovery since November 2020 as it recorded net investor inflows totalling US$95.9 billion during the November 2020 to September 2021 period.

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