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Poor performance of discretionary CTAs continues in Q1 2015

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Following on from last week’s article, which identified groups that found success through the first three months of 2015, this extract from the Preqin Quarterly Update: Hedge Funds, Q1 2015 looks at which funds and strategies struggled to perform in Q1. 

Discretionary CTAs

CTAs experienced a revival in the latter half of 2014 following several years of subdued performance. Trend followers in particular continue to benefit from reduced levels of correlation between markets; systematic CTAs tracked by Preqin’s Hedge Fund Analyst have returned on average 17.18 per cent over the last 12 months. This contrasts markedly with the performance of discretionary CTA vehicles, with Preqin’s benchmark showing a negative return of 0.83 per cent over the same period and just 1.43 per cent over Q1 2015. Also, following a spike in discretionary CTA launches in 2013, when there were 18 new vehicles launched, the number of discretionary CTA launches has been falling. Preqin is yet to record a discretionary CTA vehicle launched in 2015.

Emerging markets

February 2015 saw the first positive month for Preqin’s Emerging Markets Hedge Fund benchmark since October 2014, with year-to-date returns for these regions rising to 2.13 per cent through March, though the benchmark remains the worst performing globally. Funds targeting developed markets have returned on average over two percentage points more for the year so far as well as comparing favourably on a risk-adjusted basis; the three-year Sharpe ratio (RFR=2 per cent) for Preqin’s Developed Markets Hedge Fund benchmark stands at 3.31 compared to 0.80 for emerging markets funds. Poor performance in 2014 was largely driven by Latin America- and Russia and Eastern Europe-focused funds. However, over the first quarter of the year, Russia and Eastern European funds have posted some sizeable returns (+9.66 per cent YTD 31 March), following the ceasefire with Ukraine and the Russian Central Bank acting to stabilise the Russian markets.

Event driven

2014 was a particularly poor year for managers seeking to profit from arbitrage opportunities created by corporate events; the cancellation of the AbbVie/Shire takeover deal due to US tax rule changes was one of a number of trades that backfired. Event driven strategy funds were on average the worst performing of the major strategies tracked by Preqin’s Hedge Fund Analyst in 2014, returning just 1.73 per cent. This poor performance has continued into 2015, and the strategy continues to lag behind this quarter despite February’s return being the strategy’s highest monthly return for over three years (+2.81 per cent). The effect of this poor performance has been damaging for many managers; over Q1 2015, one-third of funds that liquidated followed an event driven strategy.

Funds invested in distressed securities have found the last 12 months particularly tough, returning -4.21 per cent over the period. 

The poor performance of event driven funds has been noted by investors, with the proportion of investors looking to target the strategy over the next 12 months falling throughout the start of the year, from 22 per cent in Q4 2014, to 20 per cent in Q1 2015.

Preqin releases quarterly reports covering private equity, hedge funds, infrastructure, real estate and private debt. All five quarterly updates can be accessed for free in our Research Center.

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