Preqin’s Hedge Fund Investor Profiles provides exclusive and comprehensive data on the industry’s institutional investors in hedge funds, including current fund searches and open mandates. Drawing from this database of over 4,700 hedge fund investor profiles, The Q3 2014 Preqin Quarterly Update: Hedge Funds has identified which hedge fund strategies are being sought over the next 12 months. Coupled with data from Preqin’s Hedge Fund Analyst, we can look at how investor appetite for these strategies correlates with hedge fund performance, and to what extent this has had an impact on investors’ interest in certain strategies.
Both macro and managed futures/CTA strategies have experienced increased demand in investor searches and mandates according to Preqin data. During the period Q3 2014, 28% of investors sought to invest in hedge funds employing macro strategies, an increase of five percentage points on the 23% of investors which had the same appetite in Q3 2013. More notably, the proportion of interest in managed futures/CTAs has surged from 9% of searches issued in Q3 2013 to 13% in Q3 2014. Macro funds and managed futures/CTAs provide investors with some protection during downturns within equity markets, due to the lower level of correlation between the strategies and public stock markets. Following a sustained period of growth in widely followed indices (such as the S&P 500), the increased interest in both of these strategies could be due to investors protecting themselves in case of potential downturns.
However, the greater focus on these strategies also coincides with a recent turnaround in their fortunes. Despite enduring a difficult run of performance in recent years, macro strategies have posted five consecutive months of gains this year and the CTA benchmark has generated six months of positive returns, contributing to 7.13% YTD as of September 2014. Both macro and CTA strategies have gained over the past 12 months, returning 4.56% and 9.60% respectively as of September 2014.
Long/short equity funds represent the most sought-after strategy among hedge fund investors in Q3 2014, where data shows that 51% of investors with a mandate plan to target long/short equity funds in the next 12 months compared to 55% in Q3 last year. Despite a slight decline from 2013, investor interest in the most prominent hedge fund strategy has remained robust. In terms of performance, funds employing a long/short equity strategy delivered net returns of 7.00% in the past 12 months (as of September 2014), which lags behind returns posted in September 2013 for the same period (11.72%). Although long/short equities tend to struggle during market downturns, they typically provide superior risk-adjusted returns over full market cycles and remain the most identifiable hedge fund strategy among investors.
Event driven funds have seen better months as performance over the quarter struggled. The benchmark returned -2.32% over Q3 2014, marking one of the worst quarters for the strategy over the past two years. Event driven strategies returned 3.76% for the same period last year (Q3 2013) and had returned 15.18% over 12 months as of September 2013. This demonstrates the volatility of the strategy, the potential to make big gains but also significant losses. Despite this, there are some investors seeking opportunities through event driven vehicles as 23% of investors planned to target the strategy in Q3 2014 compared to 22% of investors planning the same in September 2013.
Whether investors are looking for protection in a down market or risk-adjusted returns, the strategies discussed provide them with various options to allocate their capital. While the appetite of long/short equity funds remains largely unchanged, we can see that interest in other strategies may be more cyclical in nature. As macro and managed futures/CTA strategies struggled to perform in 2013, these strategies have witnessed significant gains this year where the improved performance is helping to drive increased interest in these strategies.