Hedge funds are a broad group of investment vehicles pursuing a wide variety of investment strategies. Last year, while the S&P 500 surged about 13% in 2014 due to gains in consumer confidence and housing rebound in the U.S., hedge funds were left well behind.
Volume and Performance
Total assets in hedge funds surpassed $3 trillion for the first time on record in May 2014, according to a report from eVestment. In 2014, they added more than $88 billion, according to data compiled by the investment consultancy. Total hedge fund assets are now over $3 trillion.
Last January, new capital added was about $1 billion and it continues to flow into this industry. Total hedge fund assets increased 2.02% in February 2015, so total assets under management are now at $3.082 trillion.
During February, investors added an estimated $13 billion of new capital. Performance gains added an additional $48.1 billion to assets under management.
February Numbers and Strategies
In terms of performance, some databases compute performance based on an equal weighting (indicating the performance of an average fund), other databases use size-weighted performance (indicating the overall performance of the hedge fund industry). If we look at the Barclay Hedge Fund Index, it gained 2.89% in 2014, versus the Standard & Poor's 500-stock index of more than 13%. In a year-to-date basis, the SPDR® S&P 500 ETF (SPY, Financial) gained about 2.2%, while the Bloomberg Global Aggregate Hedge Fund Index is returning only 0.18%.
Although returns were not so huge, "Investor interest in hedge funds has been continuously accelerating since the financial crisis," said Peter Laurelli, vice president for research at eVestment, "and it has really picked up during the past two years."
Now, we are going to turn our attention to the different strategies employed by hedge funds in order to analyze February´s results.
Event driven are strategies that are driven by the outcome of specific expected events, for example investing in distressed debt funds. Investors allocated heavily to these strategies, a net $42.5 billion for the year. These funds have net inflows of $2.6 billion during February, with a strong presence of activist hedge funds managers.
Long/short equity strategies saw some growth to $790 million but it is still down $6.9 billion for the year to date due to redemptions in January.
Managed futures employ quantitative models to speculate in futures (commodities, equities, currencies, interest rates, etc). They provide the most diversification and hedging benefit of all the hedge fund strategies. They gained $4 billion in January and they bring $3.6 billion in new assets, reaching the strategy some $6.3 billion in February.
Multi-strategy funds bring $3.1 billion in inflows, and the strategy accumulates $7.4 billion.
Finally, emerging market strategies are facing a slowdown, accumulating the eighth consecutive month of outflows.
Final Comment
Hedge funds look particularly attractive for a diversified investor. The fact that the hedge fund universe includes a wide variety of financial assets strategies makes it difficult for them to outperform in a bull market.
The truth is that hedge funds have not been able to beat the market in the latest years. But we still expect this could happen for the upcoming year due to good initial results in January and February.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
