The Preqin All-Strategies Hedge Fund benchmark posted returns of 7.40 per cent in 2016, marking the best performance year for the industry since 2013 and more than tripling the 2.03 per cent gain made through 2015.
Despite a volatile start to the year which caused some performance difficulties, hedge funds rebounded to post positive returns in nine of the final 10 months of the year.
This strong period of performance for the asset class sees three-year annualised returns stand at 4.83 per cent, while five-year annualised gains have reached 7.47 per cent.
Event driven strategies hedge funds saw double-digit gains in 2016, returning 12.47 per cent for the year. This marks a sharp contrast from the previous year, when event driven funds were the only leading strategy to suffer losses (-0.78 per cent). Overall, all leading hedge fund strategies posted positive returns across 2016, and only relative value funds saw their 2016 returns (+4.74 per cent) fail to match 2015 performance (+5.65 per cent).
According to Preqin’s size classifications, smaller hedge funds were able to generate the greatest returns in 2016. Emerging and small hedge funds saw gains of 8.18 per cent and 6.40 per cent respectively in 2016, while medium and large vehicles posted performance of 5.53 per cent and 4.63 per cent
After making gains of 0.45 per cent in 2015, North America-focused hedge funds returned 10.20 per cent in 2016. Funds focused on Europe (+2.89 per cent) and the Asia-Pacific region (+1.68 per cent) struggled through the year, but strong gains in Latin America saw emerging markets funds return 9.96 per cent.
Hedge funds following a discretionary trading methodology returned 7.51 per cent in 2016, improving on 2.51 per cent gains made in 2015. By contrast, systematic funds saw their annual performance fall from 5.46 per cent in 2015 to 4.44 per cent the following year.
Despite a strong start to the year, CTAs did not enjoy sustained gains through 2016, and returned 0.91 per cent for the year. This an improvement on the 0.15 per cent recorded in 2015, but remains a long way short of the double-digit returns CTAs posted in 2014.
Funds of hedge funds recorded five months of losses in 2016, and only returned more than 1.00 per cent in July. As such, annual returns for funds of hedge funds fell to -0.25 per cent in 2016, their lowest performance year since 2011, when they saw losses of 3.98 per cent.
“2016 showed that hedge funds were able to cast off performance struggles that hampered them in 2015, and they posted the best performance year for the industry since 2013,” says Amy Bensted (pictured), head of hedge fund products at Preqin. “Fear over China’s economy in Q1, the Brexit vote at the end of Q2 and the US presidential election in Q4 drove the narrative in 2016; and although there were some high- profile losses, the associated volatility created opportunities for hedge funds to produce significant returns for investors. Looking ahead to 2017, the continued consequences of these geo-political events are likely to remain key determinants of industry performance.
“Despite the marked improvement in performance, hedge fund managers will be aware that in recent years returns have still fallen short of other alternative asset classes and public market indices. This is especially pertinent in the wake of some high-profile investors announcing the reduction or elimination of hedge fund investments from their portfolio. As a result, firms will be eager to sustain the momentum built over the latter part of 2016 and to prove their worth as investments capable of generating non-correlated, downside-protected performance.”
