Research

2018 Overview: Key Trends in Global Hedge Funds

Introduction

Hedge fund managers were on track to record their worst year since the 2008 global financial crisis as the combined onslaught of the global trade tension, Fed rate hikes, and various political concerns weighed on their returns. The Eurekahedge Hedge Fund Index was down 2.53% as of November 2018 year-to-date, slightly ahead of the underlying equity markets as represented by the MSCI AC World Index which slumped 2.72% over the same period. The industry kicked off the year with strong performance throughout January 2018, continuing the trend observed by the hedge fund industry in 2017. However, market uncertainty arose when the Trump administration imposed higher tariffs against imported Chinese goods due to their alleged unfair trade practices. The move prompted retaliations from the Chinese government, leading to the escalation of the trade war which will dominate the news headlines throughout the year. Concurrently, the Fed hiked their funds rate four times in 2018 in anticipation of rising inflation, owing to the robust growth of the US economy over the recent years. As a result, the majority of the emerging markets suffered currency devaluations which caused inflationary pressure on their economies throughout the year. The rising oil stockpile in the United States and concerns over the global economic slowdown caused oil prices to plummet, triggering major losses within the energy sector throughout the fourth quarter of the year.

Figure 1: Industry growth in recent years
 

Looking at North America, the introduced tax cut policies in the United States contributed to their economy’s robust performance as corporate earnings beat analyst estimates throughout the second and third quarters of the year, resulting in a new all-time high of the S&P 500 index in late September. However, the hawkish tone exhibited by the Fed chair Jerome Powell during a monetary policy meeting in late September unnerved investors who were already on the edge of their seats thanks to the US-China trade war, and triggered a sell-off in the equity markets around the globe. The falling equity prices in October caused roughly 80% of the long short equity hedge fund managers tracked by Eurekahedge to end the month in the red. Over in Asia, the international trade friction contributed to the slowing down of the Chinese economy as seen in their declining macroeconomic data, in particular the Purchasing Manager Index indicator. Meanwhile, in Europe, the Italy budget crisis and Brexit uncertainties have continued to weigh on the region’s equity market performance, and the latter remains to be one of the biggest risks for the region as the United Kingdom is scheduled to leave the European Union in March 2019.

The industry’s total assets under management (AUM) declined by US$82.0 billion during the year, owing to the distress in the global financial market. Three consecutive quarters of strong investor redemptions totalling US$78.9 billion were recorded since the second quarter of the year. Looking at performance-based losses, the industry saw US$47.7 billion of assets wiped out in the fourth quarter alone.

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