Introduction
The global hedge fund sector continued its robust recovery from the global financial crisis throughout 2010. The industry has witnessed strong inflows since the second quarter of 2009, while hedge funds across all regions and strategies delivered positive returns for 2009 and 2010, with some indices posting record gains during this period. The Eurekahedge Hedge Fund Index was up 10.99%[1] in 2010.
Since the start of the last decade, the global hedge fund space has seen some remarkable trends. At the start of 2000, total industry assets stood at US$277 billion and over the next seven years, the sector witnessed tremendous growth to reach US$1.95 trillion, a seven-fold increase. However, the growth trend reversed in 2008 amid the credit crunch, collapse of large financial institutions, high-profile frauds and the subsequent financial crisis. The drying up of liquidity, heightened risk aversion and resultant widespread redemptions culminated in the worst yearly performance for the industry – the Eurekahedge Hedge Fund Index lost 10.91% in 2008. Additionally, performance-based losses led to further negative asset flows, which resulted in greater losses, as managers were forced to sell potentially winning positions. The industry reached its nadir in April 2009, with assets under management falling to US$1.29 trillion – a drawdown of 33%.
Figure 1 shows the growth in the number of hedge funds and assets since 1999.
Figure 1a: Industry growth over the years
After exhibiting a strong recovery in the April-December 2009 period, managers witnessed marginal asset flows in the first six months of 2010 as investors adopted a wait-and-see approach amid the European debt predicament. However, the sector did not witness any significant outflows either, and the second half of 2010 saw hedge funds attract substantial capital from investors – the next section discusses asset flows in greater detail.
|
Figure 1b: AuM Growth in recent months
 |
Industry Make-Up and Growth Trends
Table 1 gives a breakdown of industry asset growth by performance-based growth and net asset flows since the start of 2009. Although the sector attracted more than US$85 billion between April and December 2009, this was not enough to offset the heavy redemptions seen in the first four months of the year, resulting in net negative assets flows for the full year. On the other hand, these negative flows were offset by the US$131.5 billion growth through performance – the Eurekahedge Hedge Fund Index was up 19.94% in 2009.
2010 started off with volatile movements in the markets and fears of the European debt contagion spreading to other regions, leading to heightened risk aversion among investors. However, consistent outperformance by hedge funds, as well as improving market sentiment in the second half of the year, resulted in increased asset flows to the sector. In the last six months of 2010, investors allocated more than US$60 billion through net asset flows to hedge funds globally, while the total net flow for the year was US$70.6 billion. The healthy inflow of capital, along with performance-based growth of US$116 billion, brought the total size of the industry to US$1.67 trillion as at end-December 2010.
Table 1: Monthly asset flows across global hedge funds
Month
|
Net Growth (Performance)
|
Net Flows
|
Assets at end
|
Jan-09
|
7.0
|
(95.0)
|
1384.6
|
Feb-09
|
(4.0)
|
(28.5)
|
1352.1
|
Mar-09
|
0.3
|
(34.9)
|
1317.5
|
Apr-09
|
14.0
|
(42.7)
|
1288.8
|
May-09
|
35.3
|
3.0
|
1327.0
|
Jun-09
|
(0.8)
|
11.8
|
1338.1
|
Jul-09
|
19.4
|
4.0
|
1361.5
|
Aug-09
|
12.7
|
20.2
|
1394.3
|
Sep-09
|
24.8
|
23.3
|
1442.4
|
Oct-09
|
(1.1)
|
14.8
|
1456.2
|
Nov-09
|
14.8
|
8.3
|
1479.3
|
Dec-09
|
9.0
|
(7.1)
|
1481.2
|
2009
|
131.5
|
(122.9)
|
1472.5
|
Jan-10
|
(2.0)
|
(5.2)
|
1473.9
|
Feb-10
|
3.1
|
15.9
|
1493.0
|
Mar-10
|
26.2
|
1.7
|
1520.8
|
Apr-10
|
12.9
|
(1.0)
|
1532.7
|
May-10
|
(26.8)
|
0.9
|
1506.8
|
Jun-10
|
(2.1)
|
(1.6)
|
1503.0
|
Jul-10
|
13.1
|
10.4
|
1526.4
|
Aug-10
|
10.2
|
14.3
|
1550.9
|
Sep-10
|
32.7
|
14.1
|
1597.7
|
Oct-10
|
26.8
|
13.4
|
1637.9
|
Nov-10
|
(4.0)
|
(0.2)
|
1633.7
|
Dec-10
|
26.0
|
8.1
|
1667.8
|
2010
|
116.0
|
70.6
|
1667.8
|
Source: Eurekahedge
Figure 2: Eurekahedge Hedge Fund Index vs 3-month moving average net flows
displaced by 1 month
Table 1 shows an interesting correlation between a month's negative performance and net redemptions in the following one or two months, and this is equally true for net inflows following months of strong positive performance returns. Figure 2 shows the 3-month moving average of net flows displaced by one month, plotted against the Eurekahedge Hedge Fund Index. This seems to suggest that investors have subscribed one to two months after periods of positive performance and redeemed two months after periods of negative performance at corresponding magnitudes to the underlying performance. The movements in 2010 bear special significance as investors remained on the edge for most part of the year, and hence, the net flows seem to follow the index more closely.
Figure 3: Monthly asset flows to global hedge funds vs global funds of hedge funds
Figure 3 compares the changes in assets under management in hedge funds and funds of hedge funds. While hedge funds started growing after April 2009, the fund of hedge funds sector continued to witness withdrawals until July 2009 and has since then remained more or less flat. This is primarily because of increased caution among investors when dealing with the multi-manager model after largely negative returns in 2008 and some high-profile scams such as the Madoff Ponzi scheme. With concerns over the exposure to fraudulent hedge funds, institutional and private investors are now more involved and meticulous in conducting due diligence rather than simply outsourcing it to the fund of hedge funds manager. Additionally, they demand more transparency and communications from asset managers and are also directly investing in single-manager hedge funds as opposed to going through multi-managers.
Fund Sizes
The distribution by fund sizes within the global hedge fund sector has seen some changes over the last few years. Although the industry has recovered significantly since the financial crisis, the current breakdown is still quite different from the pre-crisis fund size distribution in 2007. The number of smaller hedge funds, those managing less than US$50 million, make up 60% of the sector as opposed to 51% in 2007. This is primarily due to hedge funds witnessing widespread redemptions as well as some performance-based losses in 2008 and early 2009. Since then, the proportion of smaller hedge funds has slowly decreased as managers increased their AuMs through performance-based gains and asset flows to 'graduate' into the next AuM level. Similarly, the number of hedge funds managing between US$100 million and US$500 million has decreased from 26% of the space in 2007 to 18% in 2010. Going forward, we expect the number of funds in this category to increase through greater capital flows in 2011 and we predict the fund size distribution by end-2011 to be similar to that of 2007.
Figures 4a-4b: Industry breakdown of hedge funds by fund size
 |  |
Geographic Mandates
Figures 5a and 5b show the changes in the distribution of hedge fund assets in different geographies. While the breakdown of the industry in terms of geographical allocations has remained similar to what it was in 2007, there is a slight but discernable increase in assets allocated to North American hedge funds while the percentage of assets in European hedge funds has decreased. This is attributed to the strong asset flows to North American hedge funds in 2010 as well as their outperformance to European funds in 2009 and 2010.
Figures 5a-5b: Changes in the geographical allocations of hedge fund assets
 |  |
Regional Asset Flows
Although hedge funds witnessed strong asset flows in 2010 and all regions ended the year with net positive asset flows, the split across the regions shows that most of the assets were allocated to North American hedge funds.
Table 2 shows the monthly asset flows across the different regions over the last two years. It is hardly surprising that North American hedge funds gained the lion's share of investor allocations since the region accounts for the largest chunk of assets in the industry (US$1.1 trillion) as well as being home to a large pool of hedge fund investors such as family offices, pension funds and high-net-worth individuals. The regional hedge funds gained US$60.4 billion through net subscriptions alone and witnessed 11 straight months of positive asset flows. This accounts for 86% of the total asset flows into global hedge funds and is proportionally greater than the 66% share of North American hedge fund assets in the overall global industry.
Table 2: Monthly asset flows across regions
Asia ex-Japan
|
Japan
|
Europe
|
Latin America
|
North America
| |
Jan-09
|
(8.3)
|
(0.8)
|
(20.5)
|
(2.2)
|
(63.2)
|
Feb-09
|
(3.9)
|
(0.8)
|
(10.3)
|
(0.9)
|
(12.6)
|
Mar-09
|
(4.2)
|
(0.4)
|
(4.5)
|
(0.3)
|
(25.6)
|
Apr-09
|
(4.5)
|
(0.6)
|
(3.9)
|
(0.6)
|
(34.4)
|
May-09
|
(2.8)
|
0.2
|
2.6
|
1.9
|
1.1
|
Jun-09
|
(0.2)
|
(0.0)
|
4.2
|
0.6
|
7.2
|
Jul-09
|
0.5
|
(0.1)
|
2.5
|
1.5
|
(0.4)
|
Aug-09
|
1.7
|
0.1
|
5.8
|
1.7
|
10.9
|
Sep-09
|
1.0
|
0.2
|
7.5
|
1.3
|
13.3
|
Oct-09
|
2.9
|
(0.1)
|
6.1
|
0.8
|
5.1
|
Nov-09
|
0.7
|
0.4
|
2.2
|
0.5
|
4.5
|
Dec-09
|
0.6
|
(0.7)
|
(0.6)
|
0.3
|
(6.6)
|
2009
|
(16.5)
|
(2.6)
|
(8.9)
|
5.9
|
(100.7)
|
Jan-10
|
(0.5)
|
(0.1)
|
(2.0)
|
0.1
|
(2.6)
|
Feb-10
|
(0.8)
|
0.1
|
(1.6)
|
0.8
|
17.5
|
Mar-10
|
0.3
|
(0.4)
|
1.1
|
0.3
|
0.3
|
Apr-10
|
(0.3)
|
(0.1)
|
(1.8)
|
(0.3)
|
1.5
|
May-10
|
0.2
|
0.5
|
(5.7)
|
(0.6)
|
6.5
|
Jun-10
|
(0.4)
|
0.8
|
(3.2)
|
(0.2)
|
1.3
|
Jul-10
|
(0.1)
|
0.6
|
8.4
|
(0.2)
|
1.7
|
Aug-10
|
0.2
|
0.2
|
(0.6)
|
(0.5)
|
15.0
|
Sep-10
|
0.2
|
0.2
|
7.7
|
1.0
|
4.9
|
Oct-10
|
1.7
|
0.2
|
4.9
|
0.0
|
6.6
|
Nov-10
|
1.0
|
(0.3)
|
(3.7)
|
(0.7)
|
3.5
|
Dec-10
|
0.3
|
0.1
|
2.6
|
0.9
|
4.2
|
2010
|
1.8
|
1.8
|
6.1
|
0.6
|
60.4
|
Note: All figures are in US$ billion.
Source: Eurekahedge
Strategic Mandates
Figures 6a and 6b show the distribution of assets among the different strategic mandates.
Figures 6a-6b: Changes in the strategic mix of global hedge funds
by assets under management
 |  |
The last few years have seen a few noteworthy changes in the distribution of strategic mandates among global hedge funds, as shown in Figures 6a and 6b. Since end-2007, long/short equity managers have lost 9% of their share, primarily because of aggressive sell-off in the underlying markets and the volatile performance of long/short funds in 2008 and early 2009. Investors diversified their capital away from long/short equity funds and into other strategies such as CTA and event driven hedge funds, which increased by 4% each in the three-year period. In addition to increased capital flow, CTAs and event driven managers have also increased their share in hedge fund assets through performance-based gains. In 2008, CTA managers were up 17.90% at a time when most other hedge fund strategies suffered significant losses. Similarly, managers employing the event driven mandate have witnessed excellent returns in 2009 and 2010, gaining 39.51% and 15.83%, respectively.
However, long/short equity still remains as the strategy with the most assets under management – US$519.8 billion – and in 2010, the strategy has attracted the most capital in absolute terms. The healthy performance of long/short funds in 2009 and 2010, and the strong rebound in equity markets effectively convinced investors of the opportunity offered by hedge funds in the equity space during economic recovery phases. Table 3 shows the asset flows across the different strategic mandates in the last two years.
Table 3: Monthly asset flows across strategies
Arbitrage
|
CTA/ Managed futures
|
Distressed debt
|
Event driven
|
Fixed income
|
Long / Short equities
|
Macro
|
Multi-strategy
|
Relative value
|
Others
| |
Jan-09
|
(12.4)
|
(10.0)
|
(6.5)
|
(5.9)
|
(1.5)
|
(33.7)
|
(6.0)
|
(12.9)
|
(3.0)
|
(3.1)
|
Feb-09
|
(1.3)
|
1.4
|
(2.0)
|
(1.6)
|
(0.6)
|
(14.9)
|
(1.6)
|
(7.3)
|
(0.9)
|
0.2
|
Mar-09
|
(3.7)
|
(1.3)
|
(2.6)
|
(1.7)
|
(0.5)
|
(13.5)
|
(1.2)
|
(8.0)
|
(1.1)
|
(1.4)
|
Apr-09
|
(10.2)
|
0.8
|
(0.7)
|
(9.0)
|
(0.6)
|
(12.0)
|
(1.9)
|
(5.9)
|
(3.0)
|
(0.2)
|
May-09
|
0.9
|
3.8
|
(3.1)
|
1.7
|
3.2
|
(1.6)
|
(1.1)
|
(0.7)
|
(0.4)
|
0.2
|
Jun-09
|
0.2
|
1.4
|
0.2
|
2.2
|
(1.0)
|
4.4
|
1.0
|
2.7
|
0.2
|
0.3
|
Jul-09
|
(0.6)
|
0.0
|
(0.1)
|
1.5
|
0.3
|
1.6
|
0.2
|
2.0
|
(0.7)
|
(0.2)
|
Aug-09
|
(0.1)
|
3.1
|
0.7
|
2.2
|
2.3
|
6.4
|
1.9
|
3.3
|
0.6
|
(0.2)
|
Sep-09
|
(0.2)
|
0.9
|
4.4
|
5.3
|
0.5
|
8.3
|
0.8
|
1.7
|
0.3
|
1.2
|
Oct-09
|
(3.7)
|
0.2
|
(1.2)
|
1.0
|
3.4
|
6.6
|
1.5
|
3.1
|
0.7
|
3.2
|
Nov-09
|
1.6
|
(0.2)
|
(0.5)
|
1.7
|
0.5
|
3.3
|
1.0
|
1.5
|
(0.0)
|
(0.4)
|
Dec-09
|
(2.4)
|
(0.1)
|
(0.1)
|
0.5
|
(3.0)
|
(6.0)
|
2.4
|
1.4
|
1.0
|
(0.7)
|
2009
|
(31.9)
|
0.1
|
(11.6)
|
(2.1)
|
3.0
|
(51.0)
|
(3.1)
|
(19.0)
|
(6.3)
|
(1.0)
|
Jan-10
|
(5.1)
|
(1.7)
|
1.3
|
1.8
|
(0.6)
|
(2.2)
|
0.0
|
1.5
|
(0.0)
|
(0.4)
|
Feb-10
|
1.2
|
(6.1)
|
8.3
|
1.5
|
0.3
|
8.4
|
0.4
|
1.7
|
0.2
|
(0.1)
|
Mar-10
|
0.7
|
(1.8)
|
(0.8)
|
4.0
|
(0.2)
|
2.0
|
0.8
|
(3.5)
|
0.7
|
(0.1)
|
Apr-10
|
(0.2)
|
(0.1)
|
(0.1)
|
0.1
|
(0.0)
|
(1.0)
|
(0.2)
|
0.0
|
0.2
|
(0.0)
|
May-10
|
0.3
|
(0.4)
|
0.0
|
0.4
|
0.0
|
0.8
|
(0.3)
|
0.1
|
(0.1)
|
0.0
|
Jun-10
|
(0.5)
|
(0.4)
|
(1.8)
|
0.2
|
0.0
|
1.7
|
0.3
|
(1.4)
|
0.1
|
(0.0)
|
Jul-10
|
(2.2)
|
0.4
|
(1.0)
|
3.3
|
3.5
|
7.3
|
1.0
|
(3.0)
|
1.6
|
(0.5)
|
Aug-10
|
4.5
|
(0.3)
|
(0.6)
|
0.5
|
2.4
|
1.3
|
1.1
|
5.1
|
0.8
|
(0.5)
|
Sep-10
|
1.6
|
(2.1)
|
0.1
|
2.0
|
2.1
|
6.6
|
1.1
|
1.3
|
1.1
|
0.3
|
Oct-10
|
0.6
|
2.9
|
(1.7)
|
(2.4)
|
2.1
|
9.5
|
4.0
|
(3.2)
|
1.6
|
0.1
|
Nov-10
|
0.0
|
0.0
|
0.0
|
(0.0)
|
0.2
|
(0.0)
|
0.1
|
(0.4)
|
0.0
|
(0.0)
|
Dec-10
|
(0.4)
|
2.2
|
(0.0)
|
0.4
|
0.9
|
2.6
|
1.7
|
0.3
|
0.6
|
(0.1)
|
2010
|
0.4
|
(7.4)
|
3.7
|
12.0
|
10.7
|
37.1
|
10.0
|
(1.5)
|
6.8
|
(1.3)
|
Note: All figures are in US$ billion.
Source: Eurekahedge
Head Office Location
Figure 7: Head office location by number of funds
Figure 7 illustrates the breakdown of the hedge fund population by funds' head office locations as at end-2010. The figure shows that the US continues to be the dominant hedge fund centre and is home to almost half of the global hedge fund population. However, this share has been decreasing over the last two years as other hedge fund centres witnessed more fund launches. UK-based hedge funds and those based in other European countries significantly increased their share of the pie recently due to the rapid growth of UCITS III hedge funds after 2008. UCITS hedge funds are regulated structures run within an EU framework, running hedge fund strategies. Given the demand for greater regulation in the industry, they have become extremely popular among investors. Furthermore, since the framework also allows for these funds to be marketed across different countries within the EU and to retail clients, the regulation has attracted a significant number of hedge fund management companies to launch their UCITS funds. This reason also accounts for the change in the split of hedge fund domiciles (Figure 8), with the Cayman Islands losing substantial share.
Figure 8: Fund domiciles by number of funds
Launches and Closures
Figure 9: Launches and closures across the global hedge fund industry
2010 witnessed a flurry of launch activity in the global hedge fund industry across the different regions. The global financial crisis, as well as its aftermath, had led to a spike in the attrition rates across the hedge funds. In 2008, the number of fund closures exceeded the number of launches for the first time in the industry's history. The trend of attrition continued into 2009, with the first two quarters witnessing a greater number of closures as opposed to launches. The last 18 months, however, have seen the launch-liquidation ratio even out as the industry saw a healthy number of hedge fund start-ups by managers aiming to exploit the attractive valuations and other opportunities available in the markets. The strong launch activity in 2010 was in fact at par with historical levels of healthy growth, and we expect this trend to continue going forward as global markets stabilise and investors continue to seek out the consistent risk-adjusted performance delivered by hedge funds.
Hedge Funds above High-Water Mark
After posting excellent gains in 2009 and 2010, we expect that the majority of hedge funds in the Eurekahedge database to be above their respective high-water marks again. Table 4 gives high-water marks of hedge funds, broken down by investment region. To determine whether funds are above their high-water marks, we compare their NAVs from December 2008 to December 2010 level and then look at which funds were above their high-water marks, in the last quarter of 2010.
Looking at Table 4, we can see that Latin American hedge funds have recovered the best since the financial crisis. Nearly 66.87% of the managers investing in Latin America are above their high-water marks, meaning that they would have made performance fees in 2010. Given the healthy asset flows to the region, as well excellent performance by the funds over the last three years, this is hardly surprising. It should be noted that a lower number of funds investing with a global mandate are above their high-water mark as opposed to those hedge funds that invest with region-specific mandates. Among the different strategic mandates, we find that 65.67% of distressed debt hedge funds are now above their high-water marks – we will be publishing an analysis on high-water marks of hedge funds by strategic mandates in next month's report.
Table 4: Funds above high-water mark
Above HWM
since December 2008
|
% of funds
|
All
|
56.34
|
Asia-investing
|
55.08
|
Europe-investing
|
60.22
|
Global mandate
|
52.16
|
North America-investing
|
55.5
|
Latin America-investing
|
66.87
|
Source: Eurekahedge
Fees
The fee structures of hedge funds have changed over the last few years to reflect the fortunes of the industry as shown in Table 5. While the average management fees of hedge fund launches have not changed significantly as they are reasonable and competitive with the fees charged by other investment vehicles such as mutual funds, the average performance fees of hedge funds have seen some changes.
Before 2008, the average performance fees remained above 19% for most part of the decade. However, it was only after the financial downturn that managers responded to calls from investors to lower their performance fees. This average fell to 17.61% in 2009 as managers vied to raise capital from sceptical investors. Funds launched in 2010 have a higher average, however, which suggests that managers launching new funds are confident about asset-raising as well as their abilities to generate positive returns in different market conditions in the future.
Table 5: Average hedge fund fees by launch year
Year
|
Performance Fees (%)
|
Management Fees (%)
|
2000
|
19.53
|
1.46
|
2001
|
19.61
|
1.48
|
2002
|
19.70
|
1.60
|
2003
|
18.61
|
1.53
|
2004
|
19.56
|
1.61
|
2005
|
19.73
|
1.71
|
2006
|
19.02
|
1.65
|
2007
|
19.32
|
1.74
|
2008
|
18.84
|
1.65
|
2009
|
17.61
|
1.64
|
2010
|
18.91
|
1.59
|
Source: Eurekahedge
Prime Brokers
The global hedge fund asset distribution by prime brokers has also seen some changes since the industry peak in 2007. Tables 6a and 6b illustrate the share of prime brokers in 2007 and 2010. An important theme to note is the share of 'Others' has decreased, ie, hedge funds have moved their prime broker relationships to the larger institutions as a way of managing their counter-party risk. JP Morgan and Barclays have also joined the top 10 prime brokers club, primarily through their acquisitions of Bear Stearns and Lehman Brothers, respectively. One important point to note here is that managers have also diversified their prime broker relationships to multiple institutions, rather relying on only one prime broker.
Tables 6a-6b: Top prime brokers by market share
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Source: Eurekahedge
Administrators
Similar to the changes in the prime broker industry, the hedge fund administrator landscape has also moved towards consolidation by the larger, more well-known administrators. In fact, the share of 'Others', which includes funds with internal administration, as well as small and relatively unknown administrators, has dropped by more than 12% over the last three years. In the wake of the financial crisis, the heightened stress on regulations that hedge funds must adhere to has meant that they must employ recognised third-party administrators in order to attract any capital from investors.
Tables 7a-7b: Top administrators by market share
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Source: Eurekahedge
Performance Review
Global hedge funds finished 2010 with a double-digit performance, gaining 10.99% in the year and beating the underlying markets by more than 3.10%. The MSCI World Index[3] advanced 7.83% during the year which was marked by volatile movements in the markets. The performance marked a second year of excellent returns by managers; since December 2008, the Eurekahedge Hedge Fund Index is up 33.12%.
After finishing 2009 on a high note, the performance of hedge funds was muted in the first half of 2010 although they did an admirable job of protecting capital in volatile market conditions triggered by the European debt crisis. The second half of the year witnessed resurgence in market sentiments, leading to rallies in global markets, with hedge fund managers capturing most of the upside on offer – in the last six months of the year, hedge funds delivered a performance of 10.84%.
Figure 10 tracks the performance of hedge funds versus the MSCI World Index since 1999.
Figure 10: Performance of hedge funds over stocks since 1999
As shown in Figure 10, hedge funds have outperformed underlying equity markets quite significantly and consistently. Key takeaways from Figure 10 are listed below:
· Since January 2000, global equity markets have seen four years of negative returns while the Eurekahedge Hedge Fund Index was in the red for only one year.
· The Eurekahedge Hedge Fund Index has gained 219.12% since January 2000, whereas the MSCI World Index is down 19.94%.
· The volatility of global market returns since January 2000 is 15.47% – nearly three times that of hedge funds (5.47%).
· The decade witnessed two economic downturns. During the first downturn, global markets dropped 48.02% while the Eurekahedge Hedge Fund Index lost 1.28% in this same period. In the recent 2008 financial crisis, the MSCI World Index fell 52.21% while the Eurekahedge Hedge Fund Index fell only 13.12%.
Hedge Funds vs Other Alternative Investments
In addition to the outperformance over the underlying markets, hedge funds have also delivered greater returns over other alternative investment vehicles such as funds of hedge funds and long-only absolute return funds. Figure 11 shows the three-year annualised returns, 2009 returns and 2010 returns of hedge funds, funds of hedge funds and long-only absolute return funds.
Figure 11: Performance across alternative investment vehicles
In the long term, hedge funds have delivered the most consistent performance among the three investment vehicles, having achieved a 3-year annualised return figure of 5.87%, surpassing the performance of long-only funds by 6.41% and funds of hedge funds by 8.53%. The superior performance over the markets and other instruments can be attributed to the downturn protection offered by hedge fund managers and their ability to take short positions in overvalued securities and declining markets. This ability has been aptly demonstrated by hedge fund managers over the last three years. In 2008, hedge fund significantly outperformed global markets by losing only 10.85% on average as opposed to the 40%-60% decline in underlying markets while long-only absolute return funds posted losses to the tune of -42.37%. This trend has continued through the first half of 2010 as the markets witnessed significant volatility, mid-month reversals and sharp downturns – which translated into significant negative performance by long-only funds while hedge funds remained in positive territory for most part of the year.
Table 8: Performance across alternative investment vehicles
Eurekahedge
Hedge Fund Index
|
Eurekahedge Long-Only
Absolute Return Fund Index
|
Eurekahedge
Fund of Funds Index
| |
3-year annualised returns
|
5.87%
|
-0.54%
|
-2.66%
|
3-year annualised standard deviation
|
7.33%
|
20.70%
|
6.89%
|
2010 returns
|
10.99%
|
15.06%
|
4.47%
|
2009 returns
|
19.94%
|
47.49%
|
9.45%
|
Source: Eurekahedge
Strategies
Figure 12: Performance across strategic mandates
In terms of strategic mandates, all hedge fund strategies have delivered positive returns in 2010, 2009 and in the 3-year annualised return measure. In 2010, distressed debt managers delivered the best performance, with the Eurekahedge Distressed Debt Hedge Fund Index gaining 21.66% as managers profited from the continued low prices of high-quality debt. Distressed debt managers also capitalised on high number of high yield bond issues and low default rates. According to Fitch Ratings, high yield issuances surged 67% in 2010 to US$252.4 billion vs 2009 levels of US$151.5 billion, while the 12-month default rate for loans was at a two-year low of 1.87% (based on volume) in December 2010 as calculated by S&P.
The second-best performance in 2010 was delivered by managers employing the event driven strategy. The performance of event driven hedge funds was supported by increased corporate activity in the markets; in 2010, the value of global mergers and acquisitions totalled US$2.4 trillion. Emerging market M&A activity in 2010 reached US$806.3 billion, up 76.2% from 2009, accounting for 33% of the global volume. Since December 2008, the Eurekahedge Event Driven Hedge Fund Index has gained 61.60%.
In the longer term, CTA/managed futures hedge funds stand as the most profitable over the last three years, primarily through posting double-digit growth in 2008 at a time when most other hedge fund strategies posted sharp losses. While the strategy has not matched the gains of other hedge funds in 2009 and 2010, CTA managers have proven to be one of the most resilient and rewarding fund strategies over the longer term; since their inception in 2000, the Eurekahedge CTA/Managed Futures Index has gained 275.02%, while the average hedge fund is up 219.12%.
Table 9: Performance across strategic mandates
Arbitrage
|
CTA /
Managed futures
|
Distressed debt
|
Event driven
|
Fixed income
|
Long / Short equities
|
Macro
|
Multi-strategy
|
Relative value
| |
3-year annualised returns
|
7.12%
|
11.16%
|
6.79%
|
9.03%
|
5.68%
|
3.20%
|
7.74%
|
5.88%
|
7.75%
|
3-year annualised standard deviation
|
6.37%
|
7.30%
|
11.48%
|
11.09%
|
6.51%
|
10.05%
|
4.13%
|
6.68%
|
6.04%
|
2010 returns
|
9.40%
|
12.67%
|
21.66%
|
15.83%
|
10.39%
|
10.26%
|
7.57%
|
9.49%
|
12.12%
|
2009 returns
|
23.63%
|
3.42%
|
33.69%
|
39.51%
|
22.43%
|
23.86%
|
13.03%
|
21.19%
|
21.81%
|
Source: Eurekahedge
Regions
In terms of regional mandates, hedge funds across the spectrum delivered positive returns for 2010. The best performance, among the major hedge fund regions, was posted by North American managers who gained 14.10% in the year while Asia ex-Japan hedge funds also posted double-digit growth of 11.09% over the same period.
North American hedge fund managers displayed substantial alpha in 2010 by protecting capital during the downturns while capturing most of the upside in trending markets in a year marked by volatile market conditions and sudden trend reversals. Improving outlooks on the US economy and strong positive net flows for 11 straight months bode well for North American hedge funds, and we expect managers to continue their healthy run through 2011.
Asia ex-Japan hedge funds also posted double-digit gains in 2010 as managers made the most of rallies in underlying markets. In fact, Asia ex-Japan hedge funds have, on average, outperformed underlying markets in 2010 – the MSCI Asia Pacific Ex-Japan Index[4] was up 8.13% in the year. Japanese hedge funds provided the most outperformance among all regional mandates in total 2010 returns. Managers delivered significant downturn protection through the year and finished with a gain of 8.20% – 11.21% ahead of the Nikkei, which was down 3.01% in 2010. Overall, 2010 saw the best performances by Japanese hedge funds since 2005.
In the 3-year annualised returns figure, Latin American hedge funds stand out as the best performers with a gain of 10.22%. Not only did the managers deliver excellent returns in 2009 and 2010, but they also provided substantial downturn protection during the financial crisis, losing only 5.01% in 2008 at a time when most other hedge fund regions witnessed significant drawdowns. Furthermore, the strong performance of Latin American markets in 2009 and 2010, when more emerging market economies posted outstanding returns, has also helped the managers to attract significant capital, leading to current assets under management by Latin American hedge funds standing at historically high levels.
Figure 13: Performance across regional mandates
Table 10: Performance across regional mandates
North American hedge funds
|
European hedge funds
|
Asia ex-Japan hedge funds
|
Japanese hedge funds
|
Latin American hedge funds
| |
3-year annualised returns
|
8.66%
|
2.27%
|
3.71%
|
1.02%
|
10.22%
|
3-year annualised standard deviation
|
7.73%
|
8.58%
|
13.82%
|
7.61%
|
6.69%
|
2010 returns
|
14.10%
|
9.37%
|
11.09%
|
8.20%
|
9.62%
|
2009 returns
|
23.62%
|
20.06%
|
38.75%
|
6.10%
|
28.60%
|
Source: Eurekahedge
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