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Consistency of Performance Attracts Increasing Number of Investors to Relative Value Arbitrage Funds

by Arun Chopra

  • 05 Jan 2015
  • HF

The proportion of investors allocating capital to relative value arbitrage funds has increased over recent years as investors recognize the appeal of the strategy’s ability to deliver absolute returns while ensuring low volatility. According to Preqin’s Hedge Fund Investor Profiles, only 10% of investors are reported to have invested in these types of funds in 2011, increasing to 13% in 2012 and 21% in 2013. As of December 2014, a quarter of hedge fund investors tracked have capital committed to relative value arbitrage funds, showing the increasing appetite investors have for this strategy.

Investors with exposure to relative value arbitrage funds come from all types, the largest proportions of which are accounted for by fund of hedge funds managers (24%), foundations (21%) and private sector pension funds (18%).Other allocators include endowment plans (11%) and public pension funds (9%), with other investor types also looking for opportunities in this space.

Preqin’s Hedge Fund Analyst online database tracks over 11,000 funds and share classes with performance data and includes interactive, fully customizable benchmarks with which to view and compare industry performance. Preqin’s top-level relative value benchmark leads the way as the best performing strategy benchmark so far this year (+4.29% November 2014 YTD), surpassing the overall hedge fund benchmark (+3.71%) over the same period. However, as most investors look for risk-adjusted performance and low volatility from their hedge fund allocations, consistency is a big factor when assessing hedge fund performance. Since the beginning of 2014, funds employing a relative value arbitrage strategy have recorded positive monthly returns across the benchmark and over the longer term. The Sharpe Ratio of these funds is currently higher than the event driven benchmark and Preqin’s All Strategies benchmark (as shown in the chart below). This demonstrates the ability of fund managers employing a relative value arbitrage strategy to deliver consistent, risk-adjusted performance over different periods. 

Relative value arbitrage funds have gained increasing interest from hedge fund investors over the past few years, with this figure looking to increase in 2015. Around 6% of investors looking to allocate to hedge funds within the next 12 months plan to invest in the strategy according to the Hedge Fund Searches and Mandates tool on Preqin’s Hedge Fund Investor Profiles online service. The strategy shows its value in being able to deliver risk-adjusted performance over the past year and longer periods when compared to other strategies and the overall hedge fund benchmark; this activity does not appear to have gone unnoticed by investors. 

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