The composition of strategies employed by hedge funds launched in Q1 2015 changed markedly from Q4 2014. Preqin’s Hedge Fund Analyst online service shows that 100 new hedge funds launched in Q1 2015, down from the 166 vehicles entering the market in Q4 2014. Single-manager hedge funds accounted for the largest proportion (68%) of fund launches in Q1 2015. In this blog, we take a closer look at the composition of single-manager hedge fund strategies launched in the first quarter of 2015.
Of the vehicles launched in Q1 2015, 20% pursued credit strategies, a proportional increase of 14 percentage points from the previous quarter, as shown in the chart below. The gradual departure of traditional lenders, such as banks, from the markets has caused an imbalance, resulting in surplus demand for credit by small- and medium-sized businesses. Hedge funds are well poised to capitalize on credit opportunities and appear to be doing so, albeit at the expense of the long-established equity and macro strategies, which have seen their share of fund launches fall by eight and five percentage points respectively over the same period.
According to the 2015 Preqin Global Hedge Fund Report, 27% of institutional investors surveyed at the end of 2014 reported that they planned to increase their allocation to the credit strategies hedge fund space in 2015. While this is higher than the 25% planning to increase their allocation to the macro hedge funds over the same period, it is trumped by the 46% of investors increasing their exposure to long/short equity.
Furthermore, investors that participated in the survey were also asked about which strategies they felt either exceeded or fell short of their expectations in 2014. Seventeen percent of investors felt that credit strategies had exceeded expectations compared with only 4% that thought they had fallen short. Conversely, while 22% believed macro strategies had exceeded expectations, the largest proportion of investors (40%) felt that the strategy had failed to live up to expectations. The respondents were ambivalent concerning equity strategies, with 35% believing these had exceeded expectations and 36% stating they had fallen short.
There is a clear link between the falling proportion of new fund launches pursuing macro strategies and the negative perception of the strategy among investors. 2014 was a volatile period during which macro strategies hedge funds accounted for 40% of all fund liquidations. In January 2015, the removal of the Swiss franc (CHF) ceiling against the euro sent shockwaves across the hedge fund space, liquidating a number of macro strategies vehicles in its path. Casualties included the $830mn Everest Capital Global fund which, short on the CHF, led to the liquidation of all but one of Everest Capital’s hedge fund vehicles. Anxiety in the wake of this event, coupled with the expectation that markets will remain volatile moving forward, may explain how the macro strategy has fallen out of favour with investors.
While the composition of strategies pursued by launched funds has remained relatively steady since 2012, its trajectory may well be affected by investor perceptions and macroeconomic events going forward. It is yet to be seen whether this marked shift is a sign of things to come or whether existing trends will return as markets become less volatile.