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Surge in Relative Value Hedge Fund Launches as Resilient Returns Persevere – August 2015

by Janet Chambers

  • 24 Aug 2015
  • HF

Entering June 2015, hedge funds were experiencing a solid start to the year having already surpassed 2014 returns by the end of May. We also saw a rise in the volume of hedge fund launches in Q2 2015 to 116 new hedge funds, up from 100 new hedge funds launched in Q1 2015. However, the Greek debt crisis and the sell-off in the Chinese markets came to the forefront of the financial sector’s attention in June; hedge fund managers did not escape unscathed. Preqin’s All-Strategies Hedge Fund benchmark posted its first down month of 2015 returning -0.98% in June. Relative value hedge funds came through June as the best performing of all the strategies but still posted a small loss (-0.21%) for the month.

The number of new funds launching with relative value strategies declined at the beginning of 2015, with the strategy accounting for only eight hedge fund launches in the first quarter, compared with 17 in Q4 2014. However, the Preqin Quarterly Update: Hedge Funds, Q2 2015 highlighted a larger proportion of relative value strategies, 13 funds launched in the quarter, translating into 12% of all hedge fund launches in the quarter. By nature, relative value strategies are more market neutral than other hedge fund strategies, making them less affected by sudden market fluctuations such as those in June. The increase in relative value strategies hedge fund launches seen in Q2 2015 can be said to reflect current fund manager preferences for strategies with less volatile returns.

In the 60 months since July 2010 relative value strategies have only experienced nine down months. Despite these resilient returns, investors have shown reduced interest in relative value strategies recently. Of the searches issued by investors in Q2 2015, relative value strategies received the lowest interest of all core hedge fund strategies, with only 8% of investors currently looking for hedge funds seeking exposure to the strategy over the next 12 months.

Providing the highest Sharpe ratio (2.91) and the lowest three-year annualized volatility (1.21%) of all hedge fund strategies, relative value hedge funds have been a consistent source of risk-adjusted returns for their managers and investors. As hedge fund managers look to manoeuvre through the current uncertainty in global markets, it will be interesting to see whether relative value strategies continue their launch growth through the rest of the year and whether investor interest increases.

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