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Trading environment, volatile markets dent hedge funds’ performance

Arvind Jayaram
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Long-short equity strategy give best return in India

Global hedge fund performance was insipid in 2012 with Eurekahedge Hedge Fund Index of 2,404 funds rising by just 5.6 per cent in 2012. Despite this, assets under management by the global hedge fund industry shot up by $75 billion in 2012, taking the total size of the industry to $1.78 trillion.

In comparison, the MSCI World Index delivered a 13.8 per cent return for the year, emerging as the better option amid a rally in global markets during the second half of the year.

India-focused hedge funds achieved a return of 11.9 per cent in 2012. In comparison, the BSE Sensex gave returns of nearly 25 per cent, while investments in mid- and small-cap stocks earned 37.4 per cent and 32.2 per cent, respectively.

This was also lower than China-focused funds (14.8 per cent return), but significantly more attractive than Brazil-based funds (4.2 per cent).

Hedge funds with a long-short equity strategy were the best performers in India, achieving a return of 15.2 per cent, compared to losses of 25.2 per cent in 2011. Funds with a multi-strategy were also successful, garnering 12.5 per cent returns in 2012, compared to losses of 17.5 per cent in 2011.

Arbitrage earns 8.5%

Arbitrage funds earned 8.5 per cent, compared with losses of 13.5 per cent in 2011. But fixed income funds did poorly, losing 0.7 per cent during the year under review. Nevertheless, this was an improvement from 13.9 per cent losses in the previous year.

Hedge funds seemed on track for a good performance in 2012, rising by 4.2 per cent in the first two months, before posting losses for four consecutive months. A pickup was witnessed from July onward, with hedge funds gaining 3.9 per cent by the year’s close.

The difficult trading environment amid unpredictable and volatile global markets resulted in a slowdown in new fund launches. Just 959 hedge funds were launched during the year. In contrast, 860 funds closed shop in 2012, the highest closure rate since the 2008 financial crisis.

Hedge funds focused on emerging markets were the best performers during the year, namely Asia ex-Japan — which were up 10.5 per cent during the year — and Latin America-focused funds, up 11.2 per cent.

Globally, large-size funds with a corpus of over $500 million were the best performers, achieving a return of around 9 per cent, compared with a 7.5 per cent return for medium-size ($100-500 million) and 6.5 per cent for small-size (less than $100 million) funds.

The best-performing category was distressed debt funds (16.1 per cent returns), followed by relative value (13.6 per cent), event-driven (9.1 per cent), fixed income (10.3 per cent), long-short equity (8.1 per cent) and multi-strategy (7.7 per cent) funds.

On the other hand, arbitrage (6.3 per cent), macro (3.2 per cent) and commodity trading advisor/managed futures (1.1 per cent) hedge funds disappointed.

arvind.jayaram@thehindu.co.in

(This article was published on January 7, 2013)
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