Q3 2014 Hedge Fund Launches in Review: CTAs Benefit from Being Uncorrelated to Global Markets

by Jack Ebbs

  • 23 Oct 2014
  • HF

Preqin’s Q3 2014 Hedge Fund Quarterly Update uses data taken from Preqin’s Hedge Fund Investor Profiles and Preqin’s Hedge Fund Analyst, which provide a  360 degree view of the industry, including institutional investors’ plans for hedge fund investments, fund performance, fund strategies, fund managers and fund terms. According to The Q3 2014 Preqin Quarterly Update: Hedge Funds, there were 179 funds launched in Q3 2014 with US- and Europe-based fund managers accounting for 83% and 12% of all launches respectively. The number of macro launches declined significantly during Q3 2014, whereas the proportion of fund launches that employed an event driven strategy reached its highest level since Q3 2007.

Among these fund launches, long/short strategies continued to dominate as shown in the graph below. Indeed, long/short as a core strategy represented the majority of fund launches in Q3 2014, accounting for 55%. Interestingly, despite the revival of macro funds in Q2 2014 as detailed in the August edition of Hedge Fund Spotlight, the renaissance was short-lived as Q3 2014 saw a significant decline in macro funds: they represented 13% of all newly launched funds – the lowest proportion of all funds launched since Q3 2007. Despite the decline in macro fund launches, Preqin data indicates that there remains investor appetite for the strategy. The data shows that macro strategies were the second most sought-after strategy over the next 12 months for investors, accounting for 28% of all fund searches initiated in Q3 2014, indicating that investors are still looking towards the macro space to diversify their existing portfolios.

Despite the decline in the number of macro funds launched in Q3 2014, it is interesting to note that upon further dissection of the strategy, the number of CTA fund launches has remained consistent throughout the year. Since Q1 2013, single-manager CTA fund launches (as a proportion of all new fund launches) have generally represented between 6% and 9%, and the proportion of single-manager CTA fund launches increased by five percentage points in Q3 2014 from the previous quarter. CTAs have enjoyed their best quarterly performance (5.52%) since Q4 2010 and have posted six consecutive positive months, which has seen their returns currently up 7.13% for September 2014 YTD. Given their low correlation to equity markets, industry observers can expect to see an increase in investor appetite for CTAs should volatility in equity markets persist.

The graph above shows that the number of funds launched employing an event driven strategy in Q3 2014 accounted for 17% of all funds launched – the highest proportional representation in seven years. According to Preqin data, event driven funds have generated three-year and five-year annualized returns of over 10%, outperforming the main hedge fund benchmark over the longer term which posted 9.31% and 8.51% for the same periods respectively. Despite lacklustre returns for funds employing event driven strategies in Q3, investors may need to look beyond short term performance when assessing their positions, especially given the long term investment horizon of most event driven funds.

In conclusion, despite the decline in the proportion of macro funds launched this quarter, it is worth noting the significance of increased investor appetite for macro funds and the outperformance of CTAs throughout the period, which could offer profitable opportunities for portfolio diversification. Conversely, event driven funds remain prevalent despite being in the red this quarter. Fund managers and investors alike will be hoping that this commitment to the strategy will pay off in the long run.

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