Research

2016 Roundup - Equity Focused Hedge Fund Strategies

Equity focused hedge fund strategies have seen their assets under management (AUM) grow from US$460.2 billion since end-2009 to US$778.0 billion as of January 2017 through a combination of performance-based gains and investor allocations over the years. Having recorded six consecutive years of asset growth between 2010 to 2015, long/short equity hedge fund AUM contracted for the first time in 2016, declining by 2.56% on the back of steep investor redemptions totalling US$29.1 billion. Performance-based gains were the lowest on record in the last five years following losses in 2011. While 2017 has started on a positive note, with assets for long/short equity hedge funds approaching the US$800 billion mark, the year holds much uncertainty in store.

Figure 1 shows the returns for various equity mandated strategies – the traditional equity long/short, the equity long and short bias and equity market neutral strategies. The average long/short equity hedge fund has posted annualised gains of 5.8% during this period, which compares with gains of 10.62% and 7.12% for the S&P500 and the MSCI AC World Index (Local) respectively. To put this in perspective, annualized standard deviation for long short equity hedge funds, S&P500 and MSCI ACWI over this period have come in at 6.13%, 12.60% and 11.78% - resulting in Sharpe ratios of 0.78, 0.76 and 0.52 respectively.

Figure 1: Eurekahedge Equity-Focused Hedge Fund Indices
Eurekahedge equity-focused hedge fund indices


Table 1 summarises the key performance statistics for equity focused hedge fund strategies. Key takeaways include:

  1. Equity market neutral hedge funds have posted the best Sharpe ratio over the five, three and two year time horizons.

  2. Equity long bias strategies have underperformed the S&P500 and the MSCI World Index on a risk adjusted bases over the past five and three year time periods under consideration.

  3. Equity short-bias hedge funds have performed the worst of the lot - posting negative annualised returns over the periods under consideration.

Table 1: Performance numbers of Equity Focused Hedge Fund Indices

Eurekahedge Equity Long Short Hedge Fund Index

Eurekahedge Equity Long Bias Hedge Fund Index

Eurekahedge Equity Market Neutral Hedge Fund Index

Eurekahedge Equity Short Bias Hedge Fund Index

S&P 500 Index

MSCI AC World Index (Local)

2008
(19.24%)
(35.24%)
0.04%
20.38%
(38.49%)
(41.12%)
2009
25.92%
43.80%
7.05%
(10.13%)
23.45%
28.10%
2010
10.87%
14.29%
5.06%
(0.44%)
12.78%
9.99%
2011
(5.92%)
(10.90%)
2.57%
14.72%
(0.00%)
(9.02%)
2012
8.55%
12.92%
3.30%
(10.28%)
13.41%
13.56%
2013
16.11%
19.74%
7.82%
(22.55%)
29.60%
23.80%
2014
3.66%
3.41%
3.32%
1.73%
11.39%
6.82%
2015
3.23%
(0.43%)
7.39%
5.09%
(0.73%)
(0.52%)
2016
4.13%
5.71%
(0.52%)
(7.44%)
9.54%
7.33%
2017 January
1.69%
2.19%
0.80%
(3.21%)
1.79%
1.48%
5 year annualised returns
6.69%
7.36%
4.21%
(7.11%)
11.67%
9.17%
5 year annualised volatility
5.08%
7.85%
1.60%
11.47%
10.24%
9.86%
5 year Sharpe Ratio (RFR=1%)
1.12
0.81
2.00
(0.71)
1.04
0.83
3 year annualised returns
4.39%
4.10%
3.46%
(1.87%)
8.53%
6.13%
3 year annualised volatility
4.99%
8.04%
1.70%
11.64%
10.42%
9.91%
3 year Sharpe Ratio (RFR=1%)
0.68
0.39
1.45
(0.25)
0.72
0.52
2 year annualised returns
4.52%
3.85%
3.44%
(4.38%)
6.88%
4.30%
2 year annualised volatility
5.64%
9.29%
1.84%
13.67%
11.63%
11.50%
2 year Sharpe Ratio (RFR=1%)
0.62
0.31
1.33
(0.39)
0.51
0.29

Source: Eurekahedge


Table 2 shows the correlation matrix of equity focused hedge funds in relation to the S&P500 Index and the MSCI ACWI. As can be expected, equity short-bias hedge funds are negatively correlated to the underlying equity market indices whilst the equity market neutral hedge fund index boasts the smallest positive correlation.

Table 2: Correlation matrix

Eurekahedge Equity Long Short Hedge Fund Index

Eurekahedge Equity Long Bias Hedge Fund Index

Eurekahedge Equity Market Neutral Hedge Fund Index

Eurekahedge Equity Short Bias Hedge Fund Index

S&P 500 Index

MSCI AC World Index (Local)

Eurekahedge Equity Long Short Hedge Fund Index
1
 
 
 
   
Eurekahedge Equity Long Bias Hedge Fund Index
0.987
1
 
 
   
Eurekahedge Equity Market Neutral Hedge Fund Index
0.612
0.533
1
     
Eurekahedge Equity Short Bias Hedge Fund Index
(0.723)
(0.737)
(0.279)
1
   
S&P 500 Index
0.853
0.889
0.381
(0.695)
1
 
MSCI AC World Index (Local)
0.921
0.952
0.439
(0.750)
0.971
1

Source: Eurekahedge


Figure 2 depicts the growth in AUM for long/short equity hedge funds. While nearing close to the US$800 billion high, it is interesting to note the decline in investor allocations towards this mandate since 2013 – a year which saw record investor inflows to the tune of US$81.3 billion.

Figure 2: Asset flow breakdown for long/short equity hedge funds
Long/Short equity hedge fund asset flows


For the first time since 2008; a year which resulted in the decimation of equity focused strategies, the sectors fund population has declined. In 2016, 240 launches were recorded while 282 fund within the mandate shut down, resulting in a net decline in the fund population of 42.

Figure 3: Launches and closures across long/short equity hedge funds
long/short equity fund launches and closures

The full article inclusive of all charts and tables is available in The Eurekahedge Report accessible to paying subscribers only.

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