Hedge Fund Returns Reach Three-Year High in 2016

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Industry made overall gains of 7.40% through the year, the highest annual performance seen since 2013. The Preqin All-Strategies Hedge Fund benchmark posted returns of 7.40% in 2016, marking the best performance year for the industry since 2013 and more than tripling the gains made through 2015 (+2.03%). Despite a volatile start to the year which caused some performance difficulties, hedge funds rebounded to post positive returns in nine of the final 10 months of the year. This strong period of performance for the asset class sees three-year annualized returns stand at 4.83%, while five-year annualized gains have reached 7.47%.

Event driven strategies hedge funds saw double-digit gains in 2016, returning 12.47% for the year. This marks a sharp contrast from the previous year, when event driven funds were the only leading strategy to suffer losses (-0.78%). Overall, all leading hedge fund strategies posted positive returns across 2016, and only relative value funds saw their 2016 returns (+4.74%) fail to match 2015 performance (+5.65%).

Other Key Hedge Fund Performance Facts:

Smaller Funds Post Higher Gains: According to Preqin’s size classifications*, smaller hedge funds were able to generate the greatest returns in 2016. Emerging and small hedge funds saw gains of 8.18% and 6.40% respectively in 2016, while medium and large vehicles posted performance of 5.53% and 4.63%.

North American Funds Rebound: After making gains of 0.45% in 2015, North America-focused hedge funds returned 10.20% in 2016. Funds focused on Europe (+2.89%) and the Asia-Pacific region (+1.68%) struggled through the year, but strong gains in Latin America saw emerging markets funds return 9.96%.

Discretionary Funds Succeed: Hedge funds following a discretionary trading methodology returned 7.51% in 2016, improving on 2.51% gains made in 2015. By contrast, systematic funds saw their annual performance fall from 5.46% in 2015 to 4.44% the following year.

CTAs Struggle: Despite a strong start to the year, CTAs did not enjoy sustained gains through 2016, and returned 0.91% for the year. This an improvement on the 0.15% recorded in 2015, but remains a long way short of the double-digit returns CTAs posted in 2014.

Funds of Funds Lose Ground:

Funds of hedge funds recorded five months of losses in 2016, and only returned more than 1.00% in July. As such, annual returns for funds of hedge funds fell to -0.25% in 2016, their lowest performance year since 2011, when they saw losses of 3.98%.

Amy Bensted, Head of Hedge Fund Products at Preqin says: “2016 showed that hedge funds were able to cast off performance struggles that hampered them in 2015, and they posted the best performance year for the industry since 2013. Fear over China’s economy in Q1, the Brexit vote at the end of Q2 and the US presidential election in Q4 drove the narrative in 2016; and although there were some high- profile losses, the associated volatility created opportunities for hedge funds to produce significant returns for investors. Looking ahead to 2017, the continued consequences of these geo-political events are likely to remain key determinants of industry performance.

“Despite the marked improvement in performance, hedge fund managers will be aware that in recent years returns have still fallen short of other alternative asset classes and public market indices. This is especially pertinent in the wake of some high-profile investors announcing the reduction or elimination of hedge fund investments from their portfolio. As a result, firms will be eager to sustain the momentum built over the latter part of 2016 and to prove their worth as investments capable of generating non-correlated, downside-protected performance.”

*Preqin size classifications: Emerging (less than $100mn); Small ($100-499mn); Medium ($500-999mn); Large ($1bn plus)

(Source: Preqin)

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