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Hedge Fund Report HEDGE FuN
Hedge fund industry assets under management shrunk in the immediate wake of the financial crisis, and the onslaught of consolidation that was predicted in 2009 has started to occur in 2012, particularly in the fund of funds sector. However, since 2009 institutional investors have begun to allocate to hedge funds in greater numbers as they look to diversify their portfolios away from traditional assets and look for ways to meet their funding liabilities. As a result, hedge funds are becoming a mainstream asset of choice for thousands of institutions across the globe, rather than a niche alternative asset. This has led to a recovery in the hedge fund industry’s assets under management, and fund managers have launched new vehicles in order to tap into both investor interest from the institutional sector and some of the more interesting opportunities to come out of the market crisis.
Market conditions are continuing to prove volatile and the European sovereign debt crisis is far from resolved. As a result the landscape of fund launches over the past few years
has shifted towards strategies that are able to take advantage of these uncertain times. Long/short strategies have continually proved the most commonly launched strategy, averaging around half of all launches across each year. However, since the start of the financial crisis in 2007, long/short launches have fallen from a peak of over 50% to 45% in 2012. Relative value funds have shown a marked increase in their share of total fund launches over the past 12 months, representing 17% of all funds launched in 2012 so far. Relative value funds performed well over the past few years and increasing demand from investors is leading to growth in this sector.
Hedge funds posted returns of 5.51% in Q1 2012, the best quarterly performance since a return of 6.67% was generated in Q4 2010. This has contributed to a performance gain of 4.34% in 2012, compared to performance of -0.72% over the same period in 2011. By geographic focus, hedge funds primarily targeting North America posted returns of 1.34% in August, bringing performance for these funds to 5.84% in the first eight months of 2012 and 5.27% over the last
12 months. Europe-focused vehicles have not fared as well, generating a return of 0.74% in August and 3.48% in the first eight months of 2012.
When looking at hedge fund performance by strategy, long/short funds have not performed as well as other strategies during 2012, despite offering superior returns during Q1 2012. Funds with a long/short strategy generated a return of 1.73% across July and August of this year. However, a challenging second quarter, including performance of -3.85% in May, and the effect of difficult conditions in September 2011 (-5.22%) have contributed to long/short funds posting a performance of -0.52% over the last 12 months.
In recent years the hedge fund investor landscape has changed fundamentally due to the rising prominence of institutional investment in hedge funds. Institutional investors currently represent around 65% of the capital at work in hedge funds, and over the past five years institutions including pension funds, insurance companies and
Annual Hedge Fund Launches by Strategy
60% 50% 40% 30% 20% 10% 0%
Pre 1996 1996 Long/Short 1997 1998 1999 Relative Value 2000 2001 2002 2003 Global Macro 2004 Inception Year Multi-Strategy Event Dr 2005 2006 2007
84
Proportion of Total Market Launches