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Hedge Funds Stronger in January, Thanks to The Fed

Risk-on sentiment returned in January, with good news on trade talks and with the Federal Reserve in the United States putting some distance between itself and its 2018 hard-money stance (the Fed started saying in January that it would be “patient” about selling off-balance sheet assets).

Globally, hedge funds grew (from performance) by a total of $22.1 billion in January. By geography, funds with a North America mandate did best, with a $16.9 billion performance growth in the month, accounting for most of that global total. Japan mandated funds did worst for the month, although they did manage to end up in the black ink, with $100 million in growth.

By strategic mandate, it was the long/short equities that did best, up $23.1 billion in January. As Eurekahedge observes, managers with a long/short equity strategy were “well-positioned to benefit from a strong recovery in the global equity market,” and as progress in trade talks between the United States and the People’s Republic of China underwrote optimism about global equities. CTA/managed futures took a hit, though, down $2.5 billion. This hit came despite a strong recovery in both the energy and the industrial metals sectors.

January was a tricky time in Europe, with the politics of Brexit becoming ever more frantic in London and with the European Central Bank laying out its bad loan deadlines in the middle of the month. Still, Europe’s fund managers registered gains of $3.3 billion. Meanwhile, they sustained outflows of $2.3 billion.

Total assets in the European industry are at $500.8 billion, which is below the all-time high of a year ago, a decline of more than $76 billion.

Nearly three quarters of the hedge fund managers tracked by Eurekahedge posted positive returns in January (73.8%), a sharp contrast with a lousy December.

Funds of Hedge Funds

This month’s report includes a discussion of funds of hedge funds in today’s global marketplace. The question about these vehicles has always been: aren’t they just adding an extra layer of fees? Couldn’t most investors in hedge funds simply do the work of hedge fund selection themselves and cut out the middleman? Funds of hedge funds have not been giving an adequate answer to that question of late.

The number of funds of funds, and the total assets they manage, have declined year by year with great consistency since the global financial crisis a decade ago. The number of funds of funds is now only a little more than 2,500, and the AUM is now less than $500 billion.

The decline in the number of launches had been dramatic: from more than 500 launches of such funds worldwide in the year 2009 to just 100 in 2018. With this has come a decline in the fees that such funds can charge, given broad skepticism about the value proposition. In 2017, funds launched charges an average management fee of just 0.94%. There was a slight rebound in 2018, taking that number back up to 1.0%, but one might consider that number more of a rounding-out than a rebound, and the pre-global financial crisis average was 1.4%.

The market’s skepticism about funds of hedge funds seems frankly quite justified by the return statistics. Since the end of 2009, the Eurekahedge Fund of Funds Index has generated only 2.32% return per year, well behind the 4.88% and 5.85% per year returns recorded the hedge fund index and the long-only absolute return fund index, respectively, over the same decade.

UCITS Hedge Funds

This month’s Eurekahedge also includes a brief report on Undertakings for Collective Investment in Transferable Securities (UCITS), an EU directive that spawned the UCITS funds industry.

UCITS funds have been developed to meet a demand for “underlying investment products and instruments … monitored by international compliance standards.”

The number of such funds grew steadily from 2009 to 2015. It reached a ceiling then, but it hasn’t come back down from that ceiling in the years since. It has in the neighborhood of an even 1,000 funds and close to $300 billion assets under management.

UCITS hedge funds generally have a global mandate, through (as one might expect from their domicile) they have a disproportionately large share of assets devoted to Europe (30.4%).

To be more specific about domiciles: Luxembourg is the location of choice for UCITS-compliant funds (56.6%), followed by Ireland (35.0). Those two jurisdictions between them account for 91.6% of the entire UCITS fund population.

In terms of the location of the head office, though, the United Kingdom gets the largest chunk of the pie at 42.1%. This might change soon as the consequences of Brexit shake themselves out.