Hedge funds realized their best performance since 2010, returning 11.08% last year, industry consultant Preqin says. Equity long-short and M&A arbitrage strategies are expected to deliver in 2014 as well.
“Event driven and long-short funds led the way in terms of performance in 2013,” Amy Bensted, Preqin’s head of hedge fund products notes in a statement, “with CTA funds producing disappointing returns for the third year in a row. Emerging market funds were unable to sustain the performance into 2013, posting just 4.86% compared to the 12.62% returned in 2012. However, Asia-Pacific-focussed funds had another strong year, up 16.73%, making it the top performing region in 2013.”
Confidence in the asset class has returned. At 21%, the share of investors stating that return expectations have been exceeded stands at an all time high. Another 63% said their expectations were met.
This is despite the fact that average hedge fund returns continue to lag equity indices, such as the S&P 500. Global equities returned about 25% in 2013, driven by earnings growth and P/E multiple expansion.
“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,” Bensted explains. “The performance of hedge funds over 2012 and 2013 has certainly delivered this.”
Only 10% of the stocks in the S&P 500 posted negative returns in 2013, analysts at Lyxor Asset Management point out. This highlights the difficulty for long-short hedge funds to find attractive short trades.
“In contrast to last year, we believe that stock selection and relative value strategies will offer more attractive opportunities,” they note. As a result, one segment in the hedge fund universe to watch will be the variable bias managers, who generate returns from stock picking on the long and short sides.
Other strategies that should do well include merger arbitrage as a “resurgence of M&A activity from late 2013 is sustained in 2014.”
“The environment for hedge funds to generate relative value returns is more attractive than it has been in many year and 2014 should be a bright year for the industry,” says Jeanne Asseraf-Bitton, head of global cross asset research at Lyxor.
Research house Eurakehedge last week announced that total assets in the hedge fund industry increased by almost 13% in 2013 to breach US$2 trillion. Greater China focussed hedge funds were up 19.39%, outperforming the Hang Seng Index by more than 16%.
