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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)

RiskDiceThe average holding period for private equity-backed buyout deals hit a record high in 2014, but has seen a notable drop for companies exited so far in 2015, according to the latest data from Preqin.

The average time that private equity firms have been holding buyout investments in their portfolio has been rising year-on-year since 2008. This reached a record high of 5.9 years for companies exited in 2014, almost two years longer on average than companies sold in 2008.

Yet for investments realised so far in 2015, the average holding period has dropped to 5.5 years. This marks the first point that the average holding period for buyout deals has seen a drop since the financial crisis, and is coupled with a strong exit environment which has seen a record number and total value of private equity-backed exits in 2014.

According to the alternative assets industry data and analysis firm, European companies sold so far this year had the longest average holding period of 5.7 years, compared to North America companies sold in 2015 YTD which had an average holding period of 5.3 years.

In the period since 2006, energy & utilities companies have had the shortest holding period, with these companies being held for an average of 4.3 years. By comparison, companies in the industrials sector and consumer & retail have had the longest average holding period of 5.3 years.

“Private equity investments are traditionally long-term investments with typical holding periods ranging between three and five years. The average holding period for these deals has in fact been rising steadily ever since the financial crisis, and reached almost six years on average for deals exited in 2014. Yet for companies sold over the first few months of 2015, this average has fallen, which may indicate this trend has turned a corner,” said Christopher Elvin, Head of Private Equity Products, Preqin.

“Although fund managers are largely holding onto portfolio companies for longer, the recent exit environment has been strong; the number and total value of exits in 2014 reached their highest levels on record. Yet even with this strong exit environment and the average holding period falling slightly, a significant proportion of companies bought during the buyout boom of 2006-2007 still remain active in private equity firm portfolios.”

GrowthLinePrivate equity fundraising remained strong in 2014, although capital was concentrated among fewer funds, according to Preqin.

According to Preqin, 977 private equity funds held a final close throughout the year raising a total of $486 billion (€410 billion), higher than any annual amount between 2009 and 2012, and on track to match the 2013 total, as at mid-December.

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However, the $486 billion (€410 billion) in capital commitments was spread between the lowest number of funds in any year since 2009.

The amount of capital raised is on track to match the amount of capital raised in 2013 ($531 billion / €446 billion), as Preqin expects the 2014 fundraising figure to increase by 10-20% as more information becomes available.

For the funds that did close, the average time to reach a final close fell by two months; funds that closed in 2014 took an average of 16 months, compared to 18 months for funds closed in 2013.
There was increased fundraising success in 2014, with 52% of funds closed above their fundraising target, while a further 17% met their fundraising target. This compares to 47% of closed in 2013 funds which exceeded their target.

First-time funds closed in 2014 accounted for 7% of total capital secured by funds over the year, the same proportion as in 2013.

The largest fund to close in 2014 was buyout fund Hellman & Friedman VIII, which held a final close on $10.9 billion (€9.15 billion).

According to Preqin, investor sentiment towards the asset class remains very positive with almost half of the investors surveyed by Preqin in December expect to make their next private equity fund commitment in the first half of 2015.

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