AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Hedge fund industry performance & asset flows - 2008 in review

Rajeev Baddepudi

Eurekahedge

Q2 2008

 

Introduction

Hedge funds had a healthy year in 2007, with the composite Eurekahedge Hedge Fund Index up a solid 13.4 percent. This compares favourably with performance during the last three calendar years – 14.4 percent (2006), 12.2 percent (2005) and 10.5 percent (2004). The year’s performance has weathered credit related woes, the attendant risk aversion and drying up of liquidity in the underlying markets, which manifested themselves early in the third quarter of 2007. The ensuing down month (August -1.9 percent) was one of only two in the last twelve. The other negative month was November (-2 percent), largely owing to profit booking. After a pro-active Federal Reserve a larger-than-expected 50 basis point cut in the interest rates in mid-September led to a return of optimism into the markets during the following months.

In this write-up, we take a closer look at the strategy/ regional aspects of the year’s performance, and also at how this performance has shaped asset flows into the industry. The analysis includes a comparison of key hedge fund strategies against their peers in the long-only and fund of funds spaces.

Performance Overview

To review the performance of various hedge fund strategies in 2007, we compare two measures of the same in Figure 1 below – absolute return and risk adjusted return (i.e., Sharpe ratio). On the basis of the combined measure, style based performance during the year may be classified into four broad categories, in the order of preference of a typical risk averse investor; high-return/low-risk, low-return/low-risk, high-return/high-risk and low-return/high-risk (assuming a Sharpe ratio of 1 or above as indicative of a low-risk strategy and annual returns of 12 percent or above as indicative of high-return).

 

 Hedge Fund Industry Performance - Figure 1

 

While the majority of hedge fund strategies have returned close to or upwards of 12 percent on the year, an equal number of them appear to have been affected by the mid-year market turmoil caused by the meltdown in the US sub-prime markets. This has had a negative effect on risk adjusted returns across the board, with the understandable exception of multi-strategy funds. It is interesting to contrast this with a similar analysis of strategy wise performance in 2006 – five of the ten strategies studied were squarely in the top performing category of high-return/low-risk; event driven, distressed debt, arbitrage, relative value and multi-strategy.

Of course, this is by no means a reflection of the quality of the year’s returns per se, as this has to be viewed in the context of conditions in the underlying markets. Significant activity levels (new issuance as well as secondary markets) in the M and A and high-yield spaces favoured opportunistic strategies during the earlier half of the year. On the other hand, arbitrage and relative value players benefited from the market volatility ensuing from the sharp market correction in the third quarter of 2007.

By comparing the quarterly returns generated among the various hedge and long-only strategies, one can appreciate the impact of underlying market conditions on hedge fund performance during the year. It is evident that most strategies have significantly underperformed during the latter half of the year. The notable exceptions were, (owing to reasons stated earlier), managed futures, global macro and relative value funds. Managed futures and macro funds benefited from clear trends in the energy and currency markets during the second half of the year (oil and gold prices rose by over 50 percent and 30 percent respectively), while an upward rise in volatility and mis-priced assets worked in favour of relative value players.


On the flip side, strategies such as event driven, distressed debt and fixed income were directly affected by the tightening credit conditions and the drying up of liquidity in the M and A, and high-yield markets. They were either flat or shed some of the gains made during the strong, bullish trends of the first half. The case with long-only strategies was similar. These returned 13 percent in the first half and a mere 3 percent in the second.

Asset Flow Overview

The direction of asset flows and asset growth during 2007 was largely shaped by fund performance and subscriptions/ redemptions, while inflows owing to fund start-up activity (US$ 4 billion) had only a marginal impact on asset growth. Net industry inflows during the year are estimated at US$ 193.5 billion, which translates into an 8 percent decline in inflows year-on-year (inflows in 2006 exceeded US$ 211 billion) and a 13 percent rise in total assets from US$ 1.45 trillion as at the end of 2006 to the current US$ 1.65 trillion. These numbers mask quite a bit of turbulence intra-year; inflows during the first three quarters of the year added up to US$ 316.3 billion, which was nearly twice the size of inflows during the same period in 2006. These were offset by net outflows to the tune of US$ 122.8 billion during the fourth quarter 2007. Figure 2 below depicts the key components of these asset flows in each of the four quarters, contrasting the nature of flows between hedge funds and long-only funds. The figure also charts an asset growth index (AGI) for either type of fund (equalised to 100 as of the end 2006).


Hedge Fund Industry Performance - Figure 2

 

 It is interesting to note that hedge funds and long-only funds had different drivers of asset growth during 2007. A case in point is the nature of flows in the fourth quarter of 2007, the main driver of which was negative performance in the case of hedge funds and redemptions in the case of long-only funds. It is fair to surmise that a portion of these assets leaving long-only vehicles were re-allocated to more conventional hedge fund strategies during the fourth quarter of 2007.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Members
    7. Global Partners
    8. FAQs
    9. Opportunities at AIMA
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
    4. Update Profile
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Systemically Important Financial Institutions ('SIFIs')
      6. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      7. Shadow Banking
      8. Volcker Rule
      9. Other
      10. Systemic Risk Reporting
      11. Dealing Commission
      12. Corporate Governance
      13. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      3. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      4. Insurance Regulation
        1. Solvency II
      5. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      6. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      7. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      8. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      9. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Short Selling Bans
        5. Securities Settlement
      10. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FAIFs and FINROFs
      5. FIN 48 and IAS 12
      6. Financial Transaction Tax (FTT)
      7. UK Investment Management Exemption (IME)
      8. UK Offshore Funds Regime
      9. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Useful Websites
    11. Glossary
  8. Events
    1. AIMA Events
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites