Preqin’s Hedge Fund Online currently tracks 611 hedge fund managers collectively offering 1,165 active relative value strategies funds. Relative value strategies hedge funds seek to profit from price differentials between multiple related financial instruments across equity, derivatives, fixed income and many other types of securities.
In 2015, the Preqin All-Strategies Hedge Fund benchmark made gains of 1.86%, its worst annual performance since 2011. Following five months of positive returns to May 2015, the markets were troubled by a series of global events which resulted in challenging conditions for hedge fund managers. Relative value strategies did not enjoy the same initial growth to May 2015 as equity strategies and the All-Strategies Hedge Fund benchmark; however, they were the only top-level strategy that had not reached its peak by this time before going on to decline. Over 2015, relative value strategies achieved a 5.2% cumulative return, outperforming the All-Strategies Hedge Fund benchmark as well as the equity and credit strategies benchmarks.
Due to the downside protection inherent within an arbitrage strategy, the losses generated in these funds tend to be minimized. The greatest loss for relative value strategies funds during 2015 was -0.61% in August. This still significantly outperforms the All-Strategies Hedge Fund benchmark, which fell by 2.18% in the same month – also its worst performing month of 2015. Furthermore, relative value strategies funds have exhibited stronger risk-adjusted returns, with three-year annualized volatility of 1.62% and a three-year Sharpe ratio* of 2.74 (versus 3.77% and 1.11 for the All-Strategies Hedge Fund benchmark, respectively). This reflects the narrower distribution of returns resulting from the limited losses on the downside.
The top performing sub-level relative value strategy over 2015 was equity market neutral, realizing returns of 7.07%, three-year annualized volatility of 1.57% and a Sharpe ratio of 3.16. These figures showed significantly superior performance compared with equity strategies as a whole, which returned just 0.67% in 2015, with three-year annualized volatility of 5.42% and a Sharpe ratio of 0.89.
The market volatility over 2015 produced testing conditions for hedge funds; however, performance suggests that, on average, funds employing a relative value strategy thrived in comparison with other hedge fund strategies.
*Sharpe ratio is calculated using a 2% risk-free rate.