Research

2019 Key Trends in Long-Only Absolute Return Funds

Introduction

The Eurekahedge Long-Only Absolute Return Fund Index was up 6.96% as of May 2019 year-to-date, recouping some of the losses suffered by absolute return fund managers in 2018. Over the first five months of 2019, absolute return funds have outperformed funds of hedge funds and hedge funds which returned 4.39% and 3.90% respectively, as they benefited from the equity market rally which resulted from accommodative central bank policies and robust Q1 economic data. Optimism over the progress of the US-China trade talks and dovish stance exhibited by major central banks pushed the global equity market since the beginning of the year, as seen from the 8.53% year-to-date return posted by the MSCI ACWI IMI (Local). Last year, the escalation of the US-China trade tension and the Federal Reserve’s aggressive rate hikes weighed on the equity markets around the globe and caused major sell-offs in October and December. The risk-off environment resulted in the first double-digit annual loss for the long-only absolute return fund industry since the Eurozone debt crisis in 2011.

Substantial performance-based decline and investor outflows in 2018 pushed the total assets of the global absolute return fund industry US$44.4 billion lower than the end-2017 figure, which translates to a 15.1% year-on-year decline, the worst decline the industry has seen since the 2008 global financial crisis. As of May 2019 the absolute return industry size stood at US$247.3 billion, collectively managed by 796 funds.

Figure 1: Industry growth over the years

 

In recent years, the absolute return hedge fund industry weathered through multiple financial and economic storms within the periods prior to the 2008 global financial crisis seeing much optimism in both asset population growths. In 2006, assets under management (AUM) for the industry stood at US$156.0 billion overseen by 344 funds and by the end of 2007, AUM has reached a high of US$190.2 billion, with asset growth attributed to almost equal strength in performance-driven gains and net investor inflows. The industry was hard-hit during the global financial crisis of 2008, with the Eurekahedge Long-Only Absolute Return Fund Index declining 42.30% during the year. Performance-driven losses account for the bulk of asset contraction with losses of US$65.1 billion. Steep investor redemptions of US$18.6 billion were also recorded over the year.

The performance of long-only absolute return funds rebounded in 2009, gaining 51.79%, thanks to the rebound in global equity markets post-crisis. Managers posted performance-driven gains of US$43.3 billion with investor inflows of US$13.3 billion for the year. At the end of 2009, AUM for the long-only absolute return funds industry reached US$163.1 billion, up roughly 53% from the end of 2008. Equity markets fell into negative territory in 2011 on the back of the Eurozone crisis, with long-only absolute return managers declining 13.5% over the same period. The performance of long-only absolute return hedge funds were in positive territory between 2012 and 2014, with increase in AUM attributed mostly to performance-driven gains. Asset base contracted in 2015, as the industry braced investor redemptions. At the end of 2016, AUM for the industry grew a modest US$3.5 billion thanks to performance-driven growth compensating for the trend of investor redemptions.

The full article is available in The Eurekahedge Report accessible to paying subscribers only.

Subscribers may continue to login as usual to download the full report and non-subscribers may email database@eurekahedge.com to enquire on how to obtain the full research report.

Chat