February 4, 2014

Investors Eager to Make More Hedge Fund Plays

Preqin report finds vast majority of investors were satisfied with 2013 performance

Investors are hungry for hedge funds this year after a strong 2013.

Hedge funds gained 11.1% last year, up from 10.1% in 2012 and a loss of nearly 2% in 2011, according to Preqin, a provider of data and analysis on the alternative assets industry.

Investors were largely satisfied with the performance. Eighty-four percent of investors interviewed for the 2014 Preqin Global Hedge Fund Report said their returns expectations had been met or exceeded in 2013.

Following are some of the report’s key findings:

  • 21% of investors said returns had exceeded their expectations, the highest level since Preqin started collecting these data in 2008
  • Top-quartile funds accumulated returns of nearly 30%
  • Asia/Pacific-focused funds gained 16.7% in 2013, followed by North America funds, up 16.6%, and Europe funds, up 13.6%
  • Relative value funds made gains of 7.1% in 2013, and had the lowest three-year volatility of any hedge fund strategy at 1.6%
  • Emerging market funds performed poorly — up 5.9% — compared with counterparts that targeted global and developed markets and in contrast to 2012, when they gained 12.6%
  • Macro strategies had the worst returns, adding just 2.4% in 2013
  • Comodity trading advisor funds were flat in 2013, taking three-year annualized returns to 0.9%
  • Funds of funds posted their highest net returns since 2009, up 7.7% in 2013

“In 2013, the Preqin Hedge Fund Index, a benchmark of average hedge fund returns, again lagged the S&P 500; however, despite this, investors are satisfied with the performance of hedge funds in 2013,” Amy Bensted, Preqin’s head of hedge fund products, said in a statement.

“Investors are now looking beyond absolute returns; they are also looking for funds to produce strong risk-adjusted returns with low volatility on a consistent basis. The performance of hedge funds over 2012 and 2013 has certainly delivered this.”

Preqin found that investors had a strong appetite for new hedge fund investments in 2014.

Investors most favored long/short equity strategies, among the top performers in 2013. Moreover, those looking for non-correlation and diversification were seeking out macro funds despite their underperformance in recent years.

Funds of funds, which continued to lose assets in 2013 as investors shifted capital to single-manager funds, are starting to see some inflows from established hedge fund investors, notably endowments.

Preqin explained that funds of funds have changed their game, rebranding themselves as multimanagement groups that can provide niche or customized mandates.

“If funds of funds can attract both first-time hedge fund investors through traditional products, and more established investors through innovative solutions, the sector could recoup some of its recent losses over 2014 and beyond,” Preqin said.

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