By Terry Flanagan

Hedge Fund Performance Up in Third Quarter

The third quarter overall was a good quarter for hedge fund performance, with figures posted in July and September 2013 representing two of the three strongest months for returns from hedge funds in 2013 so far, according to research released by Preqin.

Hedge funds posted net gains of 3.24% in the third quarter 2013, taking the overall benchmark to 7.17% for the year, just short of the 7.37% hedge funds had posted in 2012 as of September that year, indicating 2013 could be set to match 2012.

Investor sentiment towards hedge fund performance has improved over the past 12 months; the proportion of investors stating that hedge fund returns have fallen short of expectations has dropped from 41% in the second half of 2012 to 26% as of mid-2013.

“This quarter has been one of mixed fortunes for the hedge fund industry; however, despite returns in most hedge fund strategies being in the red for August, both July and September were strong months for hedge fund performance, bringing the overall hedge fund benchmark for 2013 to date to 7.17%,” said Amy Bensted, head of hedge funds products at Preqin.

Hedge funds were back in the black in September amid rallies in the underlying markets. The Eurekahedge Hedge Fund Index was up 1.18% during the month as global markets trended upwards, war in the Middle East was averted and the U.S. Federal Reserve did not announce the speculated tapering of its asset purchase program. The MSCI World Index gained 3.87%2 during the month.

Total assets under management (AUM) increased by $4.2 billion during the month, bringing the size of the industry to $1.91 trillion. Most of the positive impact on total assets in September came from performance as managers gained $3.0 billion over the course of the month. The industry also witnessed net positive asset flows of $1.2 billion during the month.

CTAs have continued to struggle in the third quarter of 2013, with returns of -1.63% for the quarter and -2.46% for 2013 YTD. Additionally, Preqin has observed a reduction in the proportion of hedge fund investors issuing new searches for CTAs, down from 12% in Q2 2013 to 9% in Q3.

Hedge fund managers are seeing fewer opportunities in the commodities sector as a whole, with CTA launches representing only 4% of all hedge fund launches in Q3, a decrease from 8% in Q2; there have also been some notable closures of commodity fund groups over the past few months.

Despite continued uncertainty over the AIFMD, 23% of all hedge funds launched in Q3 2013 are managed by Europe-based firms, up from 12% and 19% of new launches in Q1 and Q2 respectively.

However, there has been a reduction in UCITS funds coming to market, with these funds
representing 4% of all fund launches in Q3 2013, a drop from 9% in Q2.
Event driven funds have been the top performing strategy in the quarter, posting returns of 4.01% in Q3. Returns for event driven funds in 2013 could eclipse those in 2012, with the strategy already up 10.85% in 2013 YTD, versus 8.03% for the same period in 2012.

“Performance is seen as both the key issue in the industry and a key factor assessed by
institutional investors when looking at hedge funds in the second half of 2013,” said Bensted. “Funds that have performed particularly well in 2013, notably event driven strategies, are increasingly being sought by investors, whereas those that have been underperforming, such as CTAs, are losing investor interest.”

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