Hans Schalikier. Hedgeweek

Hedge funds hit record high AUM… hedge fund make worst start to a year since 2008…

Thu, 24/04/2014 - 18:37

Hedge funds up 0.87 per cent in Q1 2014, with fund managers delivering performance-based gains of USD21 billion and recording net asset inflows of USD38 billion over this period – bringing the current AUM of the global hedge fund industry to USD2.07 trillion, a new record high.

The Eurekahedge North America Hedge Fund Index was up 2.25 per cent in the first quarter of 2014, outperforming the S&P 500 (INDEXSP:.INX) index which gained 1.30 per cent over this period. Long/short equities funds record their 16th consecutive month of positive net asset flows, with net capital allocations to the strategy for Q1 2014 at USD38.5 billion and total assets in long/short equities hedge funds standing at USD704.6 billion – nearing close to their historical high of USD756 billion reached in December 2007.
 
Total assets in North American hedge funds reached a new high of USD1.39 trillion with assets growing by USD33.2 billion in the first quarter of the year on account of strong performance-based gains and capital allocations in the month of February.
 
Total assets in European hedge funds now stand at UUSD476.2 billion, surpassing their historical high of USD473 billion reached in October 2007. Assets under management have grown by USD21.8 billion in the first quarter of 2014 as the region recorded its 16th consecutive month of positive asset inflows.
 
Japan investing hedge funds recorded their third consecutive month of negative returns, down 1.91 per cent in the first quarter though managers have outperformed the Tokyo Topix by almost 6 per cent over this period.
 
Hedge funds hit another rough patch as the first quarter of 2014 drew to a close, giving back part of their February gains to finish the month down 0.35 per cent with the MSCI World Index returning a flat 0.04 per cent during the month.
 
In Asia, markets declined on news of disappointing PMI data from China and an impending sales tax hike in Japan. Emerging economies continued to show signs of stability with the MSCI Emerging Market Index advancing 1.69 per cent during the month as major emerging market currencies stabilized. Asia ex-Japan funds were down 1.16 per cent, attributing much of their losses to funds with a Greater China mandate. Funds investing in Greater China lost 3.42 per cent, underperforming the CSI 300 Index which declined 1.50 per cent in March. China continued to post disappointing economic data during the month, indicating that February’s weakness was not merely an aberration caused by the Chinese New Year. Japanese funds posted their third month of losses, affected by weakness in underlying markets as the Tokyo Topix fell 0.72 per cent.
 
On a quarterly basis, North American and European focused hedge funds lead the table with returns of 2.25 per cent and 1.72 per cent while funds with a Japanese mandate were down 1.91 per cent. Markets in the developed world, barring Japan, have posted some of the best returns since the start of this year, which accounts for the healthy returns posted by North America and European hedge funds in the first quarter of the year. Asia ex-Japan managers were unable to hold onto their February earnings and returned most of their profits this month, gaining only 0.14 per cent.
 
Hedge funds sealed the first quarter of the year with another month of negative returns, down 0.35 per centin March as managers navigated through a choppy start to the year. However, strong returns posted by fund managers in the previous month saw them through with the Eurekahedge Hedge Fund Index up 0.87 per cent in Q1 2014, outperforming the MSCI World Index which has gained 0.67 per cent over the same period.
 
Final asset flow figures for February revealed that managers realised performance-based gains of USD26.8 billion while recording net asset inflows of USD31.4 billion as hedge funds continued to attract strong capital allocations from investors. Preliminary data for March shows that managers have posted performance-based losses of USD0.97 billion while net asset inflows for the month stand at USD8.09 billion, bringing the current AUM of the industry to USD2.07 trillion – the highest level on record.
 
Data from Preqin’s Hedge Fund Analyst reveals that hedge funds have suffered their worst first quarter in terms of performance since 2008, with the Preqin All Hedge Fund Strategies benchmark up 1.23 per cent year-to- date (YTD). This is in contrast to both 2012 and 2013 when hedge funds achieved their highest returns in Q1, with quarterly returns of 6.07 per cent and 3.76 per cent respectively.
 
Event driven was the best performing strategy in the first quarter of the year with the event driven benchmark posting average returns of 2.94 per cent, while macro strategies again underperformed compared to the overall hedge fund benchmark with returns of 0.51 per cent in Q1 2014.
 
Long/short equity continues to be the most targeted strategy by institutional investors, with the strategy included in 68 per cent of investor searches in Q1 2014. Long/short strategies also represented a higher proportion of fund launches in Q1 (53 per cent) than in any of the previous quarters since Q1 2012.
 
The developed markets of Europe and North America presented the best opportunities for hedge funds in Q1 2014, with funds focusing on these regions up 3.21 per cent and 3.12 per cent respectively, outperforming Asia-Pacific (+0.66 per cent) and emerging markets-focused funds (-0.01 per cent).
 
The improved opportunities in these regions is highlighted in the proportions of fund launches focusing on each region; the proportion of launches represented by Europe- and North America- focused funds increased by two per centage points between Q4 2013 and Q1 2014.

Fund of hedge funds managers represented a higher proportion of all fund launches in Q1 2014 (12 per cent) than they did in Q4 2013, as well as a higher proportion of investor searches initiated (66 per cent).
 
 “The mood entering 2014 was buoyant for the hedge fund industry, following two back-to-back years of double-digit returns in 2013 and 2012. However, the first quarter of 2014 has been one of mixed results, representing the worst start to the year for hedge funds since 2008. January and March returns were both in the red, with only February’s benchmark performance of 1.75 per cent keeping performance in positive territory for the quarter. Event driven strategies continue to lead the way, with more investors willing to take on the illiquidity premium of investing in these strategies in Q1 2014 than in Q4 2013. Fund managers are predicting that developed markets will outperform emerging markets in 2014, and the first quarter results support this outlook; developed markets-focused funds posted returns of 2.21 per cent compared to the 0.01 per cent loss suffered by emerging markets funds.

Despite the volatile start to the year, investors look set to stay the course with hedge funds in the short term as fund searches continue to be issued for the year ahead. The industry will be waiting to see how the second quarter of the year unfolds, not only in terms of performance, but also in how investors and fund managers react to the changing market conditions both in terms of new capital flowing into the asset class, and what funds pick up these inflows.”
 
According to a Credit Suisse hedge fund investor survey, investors' demand for Greater China hedge funds has dropped to 18 per cent in Q1 of this year from 24 per cent in the same period in 2013. The survey result did not disclose the reason for the waning interest in China hedge funds but has stressed that investors are split between investing in Chinese stocks listed abroad and those that are focused on domestic A-shares. The same survey has also shown that interest in Japan-focused hedge funds has increased over the past two years, with 33 per cent of investors saying they will raise their Japan allocations this year, compared to 16 per cent last year and 7 per cent in 2012.
 
Reuters reports A former Soros Fund Management team will start a Hong Kong-based hedge fund in the third quarter of 2014 with at least USD150 million in initial capital including seed capital from HS Group, making it one of the biggest start-ups in the region this year.
 
Co-founded by Kenneth Lee and Michael Yoshino, the long/short equity hedge fund firm, Pleiad Investment Advisors, will focus on investments in China and Japan.
Hedge fund start-ups in Asia on average raised just over USD50 million each last year, according to data from industry tracker AsiaHedge, although the biggest of 2013, Asia Research & Capital Management, raised USD1.1 billion.
 
Most of Pleiad's capital will come from HS Group, a firm founded last year by Michael Garrow, an ex-Blackstone Group executive, and Johannes Kaps, who earlier worked at Goldman Sachs.
 
The investment represents HS Group's first seed capital investment and one of the biggest ever seed capital investments in a hedge fund in Asia, where a typical seed investment is usually around USD25 million.
 
Seeders usually pocket 20-30 cents of every dollar earned by a hedge fund in addition to their share of the return generated. Many smaller managers and those looking to start in Asia are willing to share revenues in exchange for long-term capital.
 
As much as 92.8 per cent of the Cinda shares that could be borrowed under Hong Kong rules were out on loan on April 14, the latest day for which data was available, up from 71 per cent about a month earlier, according to Markit, indicating interest from short sellers.

That has led to the cost of borrowing the stock spiking to 9 per cent of its share price per annum, compared with the less than 3 per cent that investors typically pay to borrow Asian stocks, people familiar with stock lending and borrowing said.
 
Cinda's IPO attracted a group of core backers, known as 'cornerstone investors', who put in a combined USD1.1 billion into the deal. These investors, including Oaktree Capital Management Ltd, the world's largest distressed-debt investor, and Och-Ziff Capital Management Group LLC, agreed to a six-month lock-up, which expires on 12 June.

Part of the build-up in short positions is on expectations that some cornerstone investors may decide to cut their holdings, putting pressure on the stock.
 
Cinda's pricey valuation, at 2.15 times book value, is another lure. By comparison, Industrial and Commercial Bank of China and China Construction Bank Corp trade at book value, according to Thomson Reuters data.
 
Analysts also fret about Cinda's exposure to China's coal sector, with coal prices falling 20 per cent in the first two months of 2014 due to overcapacity and tighter anti-pollution regulations. Nearly a quarter of Cinda's non-cash assets were in the coal sector through debt-for equity swaps in mid-2013, according to Daiwa Capital Markets.
 
Another concern for some: Unlike most major Chinese financial firms that are listed in both Hong Kong and Shanghai and report earnings every quarter, Cinda is listed only in Hong Kong and reports every half-year.


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