Preqin’s latest hedge fund report finds that although hedge funds are under sustained investor scrutiny, the third quarter of 2016 saw continued improvement in the performance of the asset class, marking seven consecutive months of positive returns for the industry.
The firm writes that this is the longest stretch of positive monthly returns since the second half of 2012. Fees and performance remain at the top of the list of investors’ concerns for the industry in 2016 according to Preqin Investor Outlook: Alternative Assets, H2 2016, yet this solid run of positive returns may assuage some of these concerns.
Preqin says that although more high-profile investors have indicated that they are cutting, or thinking of reducing, their exposure to hedge funds in Q3 2016 – notably New Jersey Investment Council, which announced plans to redeem USD190 million from hedge funds this quarter, and Teacher Retirement System of Texas, which is reviewing its allocation to hedge funds due to underperformance and outsized fees – there are also other investors that are seeking opportunities within the asset class.
“For instance, California State Teachers’ Retirement System plans to increase its allocation to hedge funds, adding up to USD8.7 billion to the asset class over the next three years.”
According to Preqin’s Hedge Fund Online, there have been 118 hedge funds launched this quarter. Although the largest proportion of these funds pursue an equity strategy, there has been continued decline in equity strategies fund launches over the past four quarters: in Q3 2016, just 38 per cent of funds launched followed an equity strategy, compared with 53 per cent in Q4 2015.
The largest proportion (30 per cent) of fund managers surveyed in July expected equity strategies to be the worst performing strategy in 2016, reflecting this decrease in confidence in the strategy. Despite this, funds employing equity strategies have performed the best in Q3, generating 5.10 per cent in net returns, Preqin says.
“We have noted an increase in the proportion of funds launched by North America-based fund managers over Q3 2016, at the expense of funds launched in Europe, which may have been impacted by the volatility and uncertainty arising as a result of the unexpected Brexit vote at the end of Q2 2016. Institutional investors and fund managers alike will be playing close attention to the impact of the US presidential election on markets in Q4; the value of hedge funds to reduce risk within portfolios during periods of uncertainty may be more important than ever during the final quarter of the year.”
