Did Investors Miss the Boat on Hedge Funds in 2016?

11 Jan

Did Investors Miss the Boat on Hedge Funds in 2016?

For 2016, the hedge fund industry returned +5.34%, according to the just-released eVestment December and Year-End 2016 Hedge Fund Performance Report. This is a significant rebound following a -0.72% aggregate return in 2015, which set the stage for investors during 2016 – unhappy with returns and chafing at hedge fund fees – to remove more than $83 billion from the industry (as of November 2016 data, the latest available).

Hedge funds benefitted for the several years from institutional investor interest, sending overall assets above $3 trillion for the first time in May 2014, according to eVestment. But since many institutional investment decisions take a long time to make (and unmake), results from 2015 caused many institutions to back away hedge funds. But were those moves premature?

While some high-profile hedge funds stumbled badly in 2015 and 2016, overall, all major hedge fund segments produced positive returns in 2016, with several beating equal weighted equity/fixed-income benchmarks.

Some interesting points from the report include:

  • After lagging most of the industry in 2015 distressed hedge funds capitalized on opportunities in the energy sector in 2016 to emerge as the year’s best primary strategy, returning +11.5% for the year, compared to returning -7.82% in 2015.
  • Continued strong performance in the stock market helped lead event-driven / activist hedge funds to a second place finish for the year with returns of +10.43%, compared to a weaker, but still positive +4.37% return in 2015.
  • In terms of regional exposures, Brazil focused hedge funds had the best story to tell, bouncing back from a dismal -31.23% return in 2015 to a stellar +33.29% return in 2016.
  • Russia-focused funds saw a large bump as well, returning +28.57% in 2016, compared to +4.27% in 2015. China-focused funds showed a big change in the other direction, coming in at -5.82% for the year, compared to +9.73% in 2015.
  • Managed futures were the biggest disappointment for investors in 2016, returning just 0.81%, which is not much of an improvement over the -1.62% return managed futures turned in for 2015. After a strong 2014 and a strong start to 2015, investors began placing bets with large managed futures funds, which proved to be the wrong bets to make. Large managed futures funds, with -3.63% returns for the year, were the only major segment to show overall negative returns for 2016.

For investors going into 2017, the opportunities for strong hedge fund returns exist. The question is finding the right funds and managers at the right time.

To download a copy of this report, which includes a full breakdown of results by strategy, geography and more, please click here.