Hedge Funds Ended Year with a Strong Finish

“Hedge funds performed well in 2020,” says the alternative assets intelligence firm Preqin.

With returns of 16.63% across all asset classes, hedge fund returns were ahead of the S&P 500 PR Index, which closed the year at 16.26%, according to the 2021 Preqin Global Hedge Fund Report. It was the asset class’ highest annual return since 2009.

Preqin said the best performing strategy was equities, with a 19.64% return. Credit strategies provided the lowest returns at 5.24%.

In addition to a strong upside, Preqin said, “Hedge funds also offered downside protection through lower levels of volatility over 2020 compared with the public markets.”

Accounts under management grew by 6% over 2019 to $3.87 trillion as of the end of November. Though modest, it was a significant turnaround from the first two quarters of the year when investors fled the sector for the lower cost and more passive UCITS (Undertakings Collective Investment in Transferable Securities) and ETFs (exchange traded funds).

“The direction of flow reversed in the third quarter,” Preqin says, “Suggesting an increasing investor preference for active management over tracking.”

As cautious as investors themselves, hedge fund professionals launched significantly fewer new funds. Liquidations exceeded new funds by 758 to 740 for “only the second year on record,” said Preqin. The previous time that happened was in 2019.

Still, Preqin listed 18,303 funds at the close of 2020, just behind the record of 18,391 recorded in 2018.

The report identifies what it describes as five “megatrends,” themes that will continue to shape the hedge fund industry:

  1. ESG – Typically described as social investing, ESG considers environmental, social, and governance issues in deciding on investment. Preqin says ESG “has moved into the mainstream and is a key consideration” for investors and fund managers.
  2. Capital consolidation – “Established managers are taking a growing share of capital raised across all alternative asset classes.”
  3. Diversification — Since 2016, investors’ primary reason for allocating to hedge funds has been diversification, says Preqin. That will continue, predicts the report, as “investors are more focused on low correlation than returns.”
  4. Customized solutions – The shift away from fund products can offer lower fees and allow investors and managers to take part in opportunities more equally.
  5. Rising allocation to alternatives – “Investors are increasing their alternatives allocations to produce better risk-adjusted returns and protect the downside.”

Preqin’s head of research insights David Lowery says, “After nine consecutive quarters of outflows, Q3 2020 marked the first quarter of net inflows, bringing much-needed optimism to the hedge fund industry. Established managers are taking a growing share of capital raised across all alternative asset classes, but investors are seemingly aware of the benefits of investing in first-time funds and are taking advantage of the large supply.”

Photo by Chris Liverani on Unsplash

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