Key Trends in Long-Only Absolute Return Funds (December 2021)

The Eurekahedge Long-Only Absolute Return Fund Index was up 13.02% as of October 2021 year-to-date, outperforming their hedge funds and fund of funds counterparts who were up 9.59% and 9.42% over the same period respectively. In 2020, long-only absolute return funds suffered significant losses in the first quarter of the year as news of the rapidly spreading coronavirus hammered global equity markets, resulting in the index plummeting by a staggering -21.12% in the first quarter of the year. The coronavirus was later declared by the World Health Organization (WHO) as a pandemic. The spread of the virus forced government authorities to impose lockdowns which forced businesses deemed to be non-essential to shut down operations, resulting in a surge in unemployment globally. 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 long-only absolute return hedge funds over the subsequent nine months. Long-only absolute return hedge funds returned 43.17% over 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 12.91%. Moving into 2021, long-only absolute return hedge funds have managed to sustain the positive momentum with the Eurekahedge Long-Only Absolute Return Hedge Fund Index generating eight months of positive returns, except for July and September when long-only absolute return hedge funds declined -0.94% and -1.47% 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 long-only absolute return hedge funds. As of October 2021, the long-only absolute return hedge fund industry AUM has surpassed pre-pandemic levels and currently stands at US$268.7 billion.

Figure 1: Industry growth over the years

Over the past 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 and population growth. In 2006, AUM for the industry stood at US$156.0 billion overseen by 344 funds and by the end of 2007, AUM reached a high of US$190.2 billion, with asset growth attributed to almost equal strength in performance-driven gains and net investor inflows. The industry was hard-hit during the global financial crisis of 2008, with the Eurekahedge Long-Only Absolute Return Hedge Fund Index declining 41.99% 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.

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