Alt Investments
Hedge Funds Slipped In 2018, But Outperform Wider Markets
Hedge funds fell marginally into the red overall last year but their performance wasn't as poor as for equity markets as a whole, giving some comfort to industry practitioners.
More evidence rolls in that 2018 was not a great year for the world’s $3.24 trillion hedge fund industry even though portfolios in aggregate were not hit as hard as broad equity markets, figures show.
A benchmark of strategies across the hedge fund universe, compiled by Preqin, the research firm, shows a drop of 2.27 per cent in December, meaning that the Preqin All-Strategies Hedge Fund index fell by 3.42 per cent last year, the first negative year since 2011.
By comparison, the MSCI World Index of developed countries’ equities, measured in dollars, fell by 8.71 per cent (when capital changes and reinvested dividends are combined). The MSCI Emerging Markets Index, meanwhile, fared even worse as rising US interest rates and US-China trade tensions rattled investors - down by 14.6 per cent.
In its report, Preqin noted that macro-strategies hedge funds managed to stay above water in December, returning 0.39 per cent and helping to bring the 2018 return to 0.97 per cent. This was the only major strategy Preqin tracked that was in the black for December.
Returns for equity and event-driven strategies fell sharply, returning -3.17 per cent and -4.22 per cent in December respectively.
With their traditional 2 per cent annual management fee and 20 per cent performance haircut revenue model, hedge funds have struggled to keep some investors’ faith in recent years – that 2/20 pricing structure has eroded. According to Chicago-based Hedge Fund Research, another firm tracking the sector, average management fees are around 1.43 per cent, while the average incentive fee is just shy of 17 per cent.
The fact that funds managed to avoid losses as large as those suffered by long-only traditional portfolios might give some comfort to the sector, however. According to HFR, its HFRI Asset Weighted Composite Index posted a narrow decline of just -0.8 per cent for the full year of 2018, far better than the broader market.
