One of the great myths of 2016 is that volatility has returned, says AIMA, which believes this year saw the continuation of the post-crisis trend of low market volatility, having an impact on certain hedge fund strategies.
Nevertheless, many individual hedge funds performed very well in 2016. To the end of November, average hedge fund performance was about +5 per cent (HFRI, Preqin).
AIMA’s view is that volatility has not returned, especially when compared with historic volatility levels. The long-term average (since 1990) for the Chicago Board Options Exchange Volatility Index (VIX) is 19.7. In 2015, it was 16.6 and in 2016 it has been 15.9 (up to 20 December).
AIMA points out that genuine volatility spikes are when the VIX breaches 30. Amid periods of the European sovereign debt crisis, for example, the VIX reached 34.5 in June 2010 and 43.0 in September 2011. It was higher still during the financial crisis. From September 2008 to August 2009, the average value of the VIX was 39.46, with the peak being 59.89 in October 2008.
The current period, says AIMA, is more akin to previous periods of relative calm in the financial markets, such as 1993-1995 and 2004-2006. Even during the most volatile moments this year, following the Brexit referendum and the US presidential election, the VIX hit only 25.8 and 22.5 respectively. Within weeks, it had returned below the historic average.
“At AIMA, we have looked at hedge fund performance since 1990 during periods of peak volatility – when the VIX was 32.1 or above (the top 5 per cent of VIX values). We found that, during these months (there are 17 of them), hedge funds as a whole and long/short equity hedge funds specifically outperformed the S&P total return index on the majority of occasions,” says AIMA.
“This does not mean that hedge funds only perform better during periods of high volatility. Many individual funds have performed very well in 2016 after all. To the end of November, average hedge fund performance was about +5 per cent (HFRI, Preqin data). In the final analysis, when the full-year numbers are in, we expect hedge funds to have shown they have performed better than some commentators are suggesting. And that’s in a below average year for volatility.”
Assets under management by hedge fund firms are at record levels (USD3.3 trillion, according to Preqin), and this year performance gains (5 per cent) outweighed the modest (2 per cent) outflows.
There have never been more pensions or other institutional investors allocating USD1 billion or more to these funds (238, according to Preqin) and average allocations increased from 15.9 per cent to 16.8 per cent among these investors this year (Preqin). Meanwhile, as AIMA pointed out in a study in October, alignment of interests between fund managers and investors has never been closer.
“As we look ahead to 2017, a number of predictions seem safe to make,” says AIMA. “The global alternative investment industry again will see winners and losers. Investor education will become ever more necessary as trustees and fiduciaries increase scrutiny of hedge fund allocations. The need for the industry to engage constructively with policymakers and regulators in the US and UK following this year’s events will be even more vital. And as alternatives continue to be features of the investment mainstream and play a vital role in economic growth, we are confident that 2017 will produce even more success stories for this diverse group.”
