For financial journalists, there has been an easy formula for writing an article about hedge funds in the last few years. Draw a graph of an aggregated hedge fund index against the S&P 500 over the last decade or so, and point out the gap. Note the overall industry outflows in the last couple of years. Add a paragraph about how investors are resentful of management and performance fees. Find a large institutional investor, a Calpers or a Nycers, for example, who has made a highprofile decision to downsize its hedge fund portfolio. Finally, you'll need a picture: a yacht, a stressed-looking trader, Warren Buffett smiling.
As with all of the best clichés, there is some basis in fact for each of these points. However, recent data and commentary have provided clear signs of 'green shoots' for the industry. So in the spirit of spring, at least for those of us in the northern hemisphere, we will explore them in this article.
The health of the hedge fund industry is often marked against three metrics: performance, investor flows, and investor sentiment. In April, Preqin released their Preqin Quarterly Update: Hedge Funds for the first quarter of 2017. In this update, they noted that hedge funds as an industry had enjoyed a run of strong returns going back to March 2016. Aggregated across all strategies that Preqin cover, the net returns over the prior 12 months averaged almost 11%. While some strategies had performed particularly well (activist and event-driven funds returning over 15%), returns were positive across all strategies other than CTAs.
While the S&P 500 was up nearly 18% in the same period, comparisons with the S&P (or indeed any other equity index) can be misleading. Investors in hedge funds are not looking for exposure to the broad equity markets; they can obtain those exposures themselves without paying hedge fund manager fees.
This article first appeared in HFM Week's Cayman Islands Special Report 2017.
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