Breach Inlet Capital Aimia

What A Difference A Quarter Makes For Hedge Funds

Hedge funds have rebounded from the worst quarter on record for over a decade by chalking up a net return of +5.40% over Q1 2019, recouping the losses of Q4 2018 (-4.78%) and representing the best quarter for hedge funds since Q1 2012. These are truly the best and worst of times for hedge fund performance. Although hedge funds have not matched the rally in public markets, the stance for many managers is to maintain the course when it comes to reducing long exposure, particularly given that so many geopolitical economic catalysts persist which could result in further market dislocations.

Q1 hedge fund letters, conference, scoops etc

Breach Inlet Capital Aimia

mohamed_hassan / Pixabay

Although all strategies entered Q2 in positive territory, the dispersion between strategies on a monthly basis highlights the need for investors to continue to diversify portfolios by strategy, region and exposure. CTAs, which had arguably the most difficult 2018, started slowly in 2019 (-0.14% in January 2019), but ended on a high with a March return of +2.12%. In contrast, equity strategies hit the ground running this year, with a January return of +4.46%, and ended with a March return of +0.69%.

With the expectation that volatility will continue, and with a correction increasingly likely, investors are looking across a wide range of strategies in 2019 to position their portfolios more defensively. Although our fund searches data highlights a trend we have noted in recent years – that investors are not looking to put as much fresh capital into hedge funds as we saw in the early parts of this decade – at Preqin we continue to see high levels of activity among the institutional investors we speak to as they become increasingly bearish and redeem and replace funds in their portfolios. Managers will therefore face challenges on several fronts in 2019: retaining investor capital, fundraising and weathering any more market bumps across the year.

So what options are available for investors in 2019? In addition to the 14,900+ funds already open to investment, we have recorded a further 69 fund launches in Q1 2019. Notably, we have also witnessed a spike in the proportion of funds coming to market that pursue a relative value strategy. It seems managers are perceiving greater opportunities to generate alpha through relative value strategies than directional investments in the volatile and potentially disrupted markets of 2019.

For more in-depth analysis on performance, fund managers, launches, investors and more, download your copy of the Preqin Quarterly Update: Hedge Funds, Q1 2019.

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Article by Preqin

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