Hedge funds had their best year in 10 years in 2019
A vintage year? Well, not quite. After their 2018 losses, hedge funds rode to an average annual return of 10.4% in 2019, according to the composite index of the New York research firm HFR. When weighted for each investment vehicle’s assets under management, hedge funds returned 7.7% on the year. The sector turned in its best year since its composite index soared by 20% in 2009, amidst the market rally after the 2008 financial crisis.
At that time, hedge funds were on the heels of the S&P 500. Last year, they returned almost three times less than the US equity flagship index, which rose by 29%. After a dark year for listed companies in 2018, equity arbitrage strategies were rather naturally the best-performing ones last year, with an average gain of 13.9%, according to HFR. This was their best year since 2013, and the equity markets’ best year. Tech and healthcare stocks drove the asset class. All equity strategies were winners, except funds invested in Indian stocks. However, event-driven funds (which exploit price inefficiencies due to bankruptcies, mergers, etc.), macro funds, and relative value funds returned less than 10%.
With single-digit returns, it is getting harder for many hedge funds to stand out and justify their high management fees at a time when more and more investors are switching to low-cost passive investment management. True, global hedge fund AuM set a new record last year, at $3,240bn (€2,917bn) as of 30 September, according to HFR’s most recent figures. This is twice as much as in 2009 and was driven by market performances. But annual net inflows have been negative since 2008. Net outflows were still $6.5bn in the first nine months 2019.
Meanwhile, the sector has consolidated. After peaking at more than 10,000 funds in 2013 and 2014, there were 9,500 funds as of the end of September, according to HFR, only 500 more than in 2009. Annual liquidations (540 as of the end of September) are still ahead of launches (391). Two trends have driven demand – the premiums attached to large funds and the lack of enthusiasm for alternative funds of funds. The number of these “black boxes” (1200) has halved since the financial crisis.