Industry trends

Retained Profits Buoy Hedge Fund Industry Against Squall of Investor Redemptions Net redemption activity continued to hold sway over the hedge fund industry in April, as it has for 14 of the last 16 months dating back to January of 2022. Net redemptions totaled -$30.05 billion or -0.60% of industry assets. A $12.57 billion trading profit during the month left total hedge fund industry assets hovering around the $5.03 trillion mark as April ended.…

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While Risk Factors Proliferate, Markets Shrug Hedge fund industry redemptions continued in March from the prior month’s level with -$18.31 billion in net outflows, -0.37% of industry assets. A $30.68 billion trading profit during the month brought total hedge fund industry assets to $5.03 trillion as March ended.…

An Almost Universally Gainful January Brings Investors Back to a Resilient Hedge Fund Industry After gulping fresh lungfuls of air in January, many hedge fund managers found themselves pushed underwater again in February by the boots of exiting limited partners. Hedge fund investors extracted -$11.58 billion during the month, causing a -0.23% contraction of industry assets. An aggregate -$59.87 billion trading loss in February tamped down total industry assets to $4.99 trillion as the month ended.…

Written By: Xi Dong, Qi Liu, Lei Lu, Bo Sun, Hongjun Yan Abstract The authors analyze a model in which an anomaly is unknown to arbitrageurs until its discovery, and test the model implications on both asset prices and arbitrageurs’ trading activities. Using data on 99 anomalies documented in the existing literature, they find that the discovery of an anomaly reduces the correlation between the returns of its decile-1 and decile-10 portfolios. This discovery effect is stronger if the aggregate wealth of hedge funds is more volatile. Finally, hedge funds increase (reverse) their positions in exploiting anomalies when their aggregate wealth increases (decreases), further suggesting that these discovery effects operate through arbitrage trading.…

An Almost Universally Gainful January Brings Investors Back to a Resilient Hedge Fund Industry After nearly a year of persistent monthly net outflows, the hedge fund industry reversed course in January as the industry posted $3.94 billion worth of net inflows, equivalent to about 8 basis points in asset growth, according to the Barclay Fund Flow Indicator published by BarclayHedge, a division of Backstop Solutions. A $151.82 billion trading profit in January brought total hedge fund industry assets back over the $5 trillion USD threshold to settle at $5.05 trillion.…

TOP 50 BEATS THE MARKET BY MORE THAN 23 PERCENTAGE POINTS IN 2022 Bucking virtually all market trends, Global Investment Report’s Top 50 hedge funds gained more than 5 percent last year. With fund selection based on the most consistent historical performance through 2021, more than two thirds of the group delivered positive returns in 2022. Leading the way were global macro, multistrategy, and volatility arbitrage funds. This year-end report includes full-year 2022 returns of each fund in the Top 50, analysis and interviews of leading fund managers, and insights from major hedge fund allocators about what to expect.…

Written By: Yigit Atilgana, K. Ozgur Demirtasb, A. Doruk Gunaydinc and Mustafa Oztekind Abstract Extant research provides evidence for financial innovation’s contribution to market efficiency by documenting that hedge funds which bet on positive earnings surprises manage their sector risk by shorting industry exchange-traded funds (ETFs). The authors add to this literature by considering a hypothetical hedge fund that can anticipate positive earnings news. They construct return series for a naked strategy that only takes long stock positions and a hedged strategy that also holds short positions in industry ETFs around earnings announcements with positive content. The main result is that hedging with industry ETFs improves fund performance based on various reward-to-risk ratios. This finding holds in various equity subsamples and both strategies tend to perform better among riskier stocks.…

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On Assets Industry Ends 2022 About Where It Started, Less Forward Momentum The global hedge fund industry experienced -$45.82 billion in net redemptions in December, equivalent to a -0.94% loss of industry assets. December’s outflows were up from -$20.05 billion in redemptions in November, and contributed to -$318.52 billion in total industry outflows since April 2022. A -$69.78 billion trading loss in December brought total hedge fund industry assets down to $4.84 trillion as the month ended.…

Written By: Yong Chen, Sophia Zhengzi Li, Yushan Tang, Guofu Zhou Abstract This paper identifies nine factors out of a large set of anomalies and macroeconomic factors for explaining hedge fund returns by using machine learning methods. The new factor model outperforms existing models both in sample and out-of-sample. Moreover, the model leads to a significant reduction in hedge fund alphas compared with other models, while revealing substantial cross-sectional performance heterogeneity. Further subsample analysis provides evidence of style shifting in the hedge fund industry. Overall, the proposed factors quantify well strategies and risk exposures of hedge funds and can be used for fund performance evaluation.…

Net Redemption Trend Remains Unbroken Through November 2022 Hedge fund net redemptions slowed somewhat in November to -$20.05 billion, or -0.42% of industry assets. November’s outflows followed -$52.97 billion in redemptions in October, and -$48.59 billion in September. It was a continuation of a trend that began in February that has cumulatively sapped more than $288 billion from the hedge fund industry. A $135.17 billion November trading profit brought total hedge fund industry assets to nearly $4.90 trillion as the month ended.…

Written By: Michael Bowe, Olga Kolokolova, Lijie Yu Abstract This paper examines the impact of investment banks’ prime brokerage connections to hedge funds on the choice of an advisor and the deal outcome in M&As. Acquirers are more likely to choose advisors connected to hedge funds that hold equity in the target before the deal announcement. Such connections reduce deal duration, increase the likelihood of deal completion, and increase the acquirer abnormal return when target firms are characterised by a high degree of information asymmetry, suggesting an ‘indirect toehold’ mechanism of information transmission.…

Hedge Fund Outlook Gets Grim in October October redemptions from hedge funds outpaced subscriptions by -$52.97 billion, resulting in a -1.12% contraction of industry assets. This followed September’s net redemption figure of -$48.59 billion which was heretofore the largest net outflow for calendar year 2022. October’s outflows cap an unbroken trend of hedge fund redemptions dating back to February which has reclaimed nearly $268 billion from the industry A $71.03 billion trading profit during the month brought total hedge fund industry assets to more than $4.74 trillion as October ended.…

CTAs Endure Worst Quarter of Investor Flight Since the Pandemic Began Hedge fund redemptions grew in September to -$48.59 billion (-0.98% of industry assets). September’s outflows follow net redemptions of -$18.93 billion in August and -$16.88 billion in July. In total, redemptions exceeded subscriptions in Q3 2022 by -$84.40 billion. This represents a modest slowdown from Q2’s redemption activity in which industry redemptions swamped subscriptions by -$92.08 billion. For the year to date interval, hedge funds have suffered an excess of -$203.75 billion redemptions over new subscriptions. A -$185.16 billion trading loss during the month brought total hedge fund industry assets to $4.71 trillion as September ended.…

The Top 50's Remarkable Outperformance Spiking volatility fueled by rising interest rates, high energy costs, and sustained inflation sent the market plummeting by nearly 24% through the first three quarters of the year. Russia's increased shelling of critical Ukrainian infrastructure as winter sets in is turning the war even more horrific. This is ratcheting up geopolitical tensions and global economic uncertainty as Europe appears headed for recession that's likely to jump the Atlantic and hit the US in 2023. And growing liquidity concerns threaten to turn this troublesome brew toxic. All this makes the Top 50 hedge funds’ performance even more noteworthy. The group was up nearly 4.5% year-to-date through September, outpacing the market by 28 percentage points. Outperformance continues to be driven by multistrategy, volatility arbitrage, and global macro funds. In addition to extensive data reporting and analysis, this update includes interviews and commentary from Graham Capital Management's Ken Tropin, hedge fund manager Dan Zwirn, economic historian Niall Ferguson, economist and senior fellow at the American Enterprise Institute Desmond Lachman, and New York Times columnist Thomas Friedman.…

Written By: Ekaterina Ipatova, Mamata Parhi, Tapas Mishra, Kaizad Doctor Abstract This paper produces multiple fund-of-funds’ portfolios based on sorting and a novel nonparametric approach to lend in-depth insights into the extent hedge fund returns display higher order (non-linear) persistence patterns. By exploiting monthly data from Hedge Fund Research Database between 1999:1 to 2015:12, an out-of sample exercise provides robust evidence of performance persistence over the time horizon. However, up to 80% of hedge funds appear to be ‘lucky’ performers, confirmed upon undertaking a battery of robustness measures. We name those ‘lucky’ hedge funds, which pass the classical persistence selection procedure and are selected ‘by accident’ with regard to funds with persistent returns. We argue that these funds are unlikely to experience significant outperformance in the future. Our non-parametric identification mechanism allows for a reduced number of persistent funds, enabling practitioners to focus on a few with meaningful qualitative scrutiny. Moreover, we expand the debate in the literature by analysing post-crisis data and demonstrating that after the 2008 crisis, the proportion of genuinely persistent funds got significantly reduced.…

Redemptions from Hedge Funds Exceed Subscriptions for the Seventh Month in a Row The pace of Hedge Fund redemptions accelerated slightly in August to -$18.92 billion (-0.38% of industry assets). August’s outflows followed -$16.88 billion in net redemptions in July. Even with August’s slight increase, however, net redemptions remain in a slower trend than we observed in the late spring and early summer periods of 2022 in which April saw -$22.40 billion in excess redemptions; May booked -$27.53 billion; and June showed -$42.14 billion. A -$54.13 billion trading loss during the month brought total hedge fund industry assets to more than $4.96 trillion as August ended.…

Written By: Andrew J. Sinclair, Chuyi Zhang Abstract We use a novel fund-level measure to identify 877 retail hedge funds. On average, retail funds do not underperform, either on an absolute basis or relative to institutional funds. In the cross-section, 14.3% of retail funds produce positive alpha and performance is predictable: funds with low systematic risk outperform, and poor performing funds persistently underperform. Turning to investor behavior, retail investors are “hot money” and are more likely to divest following poor performance. They do not exhibit selection ability but are not “dumb money,” and they also chase alpha and ignore (or avoid) common factor returns.…

Most Regions See On-Going Hedge Fund Redemptions in July, but Trading Profit Boosts AUM Investors continued trimming their exposures to risk assets in July, albeit at a somewhat less frantic pace than we have observed over the prior four months. This manifested as slowing net redemptions from hedge funds in July to -$16.88 billion (-0.35% of industry assets). July’s outflows followed -$42.14 billion in June, -$27.53 billion in redemptions in May and -$22.40 billion in April. A $124.13 billion trading profit during the month helped to prop up total hedge fund industry assets to more than $4.99 trillion as July ended.…

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Written by: Francesc Naya, Jahja Rrustemi, Nils S. Tuchschmid Abstract Evaluating the performance of Alternative Risk Premia products as standalone investments is not sufficient to conclude whether these products add value to institutional investors, whose portfolios are largely composed of well-diversified equity and bond allocations, and usually smaller ones to alternatives assets, including alternative risk premia products. In this article, we study whether the inclusion of ARP products add value to two well-known benchmarks of balanced allocations: the 60/40 world equity/bond portfolio and the Pictet LPP 2015-60 index. Taking a sample period from 2016 to May 2021 of live ARP products, we find that a systematic allocation to ARP with no equity exposure significantly improves risk-adjusted performance measures, due to risk reduction, even though it caused a small drag in compounded return over the long term. This impact is somehow similar to the one many investors seek in Trend-Following funds or Tail-Hedge products, for which we compare results. Finally, the drag in performance disappears if one can dynamically manage the inclusion of ARP into the balanced portfolios, even though it is well-known that market timing ability is at the very least a rare asset.…

A First Half Of Historic Divergence July brought some relief: a market rally, a soaring jobs report, and inflation numbers that didn’t accelerate as commodity prices continued their decline. This may suggest to some investors we’re past the worst of the bear market. But inflation remains stubbornly high, rising interest rates are threatening recession, food and energy insecurity are growing more acute, and serious supply chain issues remain. Somewhat forgotten: The tragic six-month Russian war against Ukraine shows no signs of letting up, exacerbating macroeconomic and security problems and raising geopolitical tensions. All of this has contributed to one of the market's worst first-half starts since the Great Depression. More remarkable that the Top 50 Hedge Funds ended the first half of 2022 in the black, outpacing the market by 21 percentage points.…

Via Reinvested Profits and New Starts, CTA Industry Continues to Achieve New Heights The pace of hedge fund redemptions accelerated in June to -$42.14 billion, equivalent to a reduction of industry AUM of -0.83%. June’s outflows were up from -$27.53 billion in redemptions in May and -$22.40 billion in April. June marked the fifth month in a row in which redemptions outpaced subscriptions. Since February 2022, when the trend began, outflows have exceeded inflows by a combined -$130 billion USD. A -$173.10 billion trading loss in June brought total hedge fund industry assets to $4.87 trillion as the month ended.…

Written by: Jongwan Bae, Timothy Haight, Chengdong Yin Abstract We examine the performance of mutual funds under side-by-side (SBS) management with hedge funds from a new perspective. Using SEC filings to identify advisory firms engaged in SBS management, we find that mutual fund performance is affected by an advisory firm’s path to SBS management (i.e., whether they started with mutual funds or hedge funds). While no significant path effects are observed when SBS advisers started with mutual funds, we observe significant outperformance when SBS advisers started with hedge funds. However, the performance benefit provided by SBS advisers that started with hedge funds becomes insignificant when SBS management is conducted at the portfolio manager level. Further analysis suggests that these effects relate to the relative contributions of mutual funds and hedge funds to advisers’ total assets and compensation. SBS advisers that started with mutual funds rely heavily on mutual funds for both assets and compensation, which could explain why mutual fund performance does not suffer when these advisers expand into hedge funds. Meanwhile, SBS advisers that started with hedge funds derive more of their assets from mutual funds, though hedge funds generally contribute more to their total compensation. These patterns suggest there are adviser-level incentives to deliver strong mutual fund performance (which attracts capital from new investors) and manager-level incentives to favor hedge funds (which increases compensation).…

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Despite Recent Outperformance, Subscriptions to CTAs Apparently Slowing Hedge Fund redemptions accelerated slightly in May to -$27.53 billion (-0.54% of industry assets), up from -$22.40 billion a month earlier. A -$26.36 billion trading loss in May brought total Hedge Fund industry assets to $5.07 trillion as the month ended.…

Written by: Fan Yang, Tomas Havranek, Zuzana Irsova, Jiri Novak Abstract We provide the first quantitative survey of the empirical literature on hedge fund performance. We examine the impact of potential biases on the reported results. Empirical analysis in prior studies has been plagued by fragmentation of underlying data and by limited consensus on how hedge fund performance should be measured. Using a sample of 1,019 intercept terms from regressions of hedge fund returns on risk factors (the “alphas”) collected from 74 studies published between 2001 and 2021 we show that inferences about hedge fund returns are not significantly contaminated by publication selection bias. Most of our monthly alpha estimates adjusted for the (small) bias fall within a relatively narrow range of 30 to 40 basis points. Considering several partitions of our sample, we document a modest publication bias only for estimates based on instrumental variables (IV), for which relatively large standard errors are common and that tend to be less precise. In contrast, studies that explicitly control for the potential biases in the underlying data (e.g. the backfilling bias and the survivorship bias) report lower alphas. Our results demonstrate that despite the prevalence of the publication selection bias in numerous other research settings, publication may not be selective when there is no strong a priori theoretical prediction about the sign of estimated coefficients, which may induce greater readiness to publish statistically insignificant results.…

CTAs Continue to See Inflows Which Push Assets to New All-Time High of $380.59 Billion Hedge fund redemptions slowed somewhat in April though the trend continued. The month’s outflows totaled $22.40 billion, 0.44% of industry assets, a reduction from the $35.37 billion in outflows the industry experienced in March. A $131.83 billion trading loss during the month brought total hedge fund industry assets to nearly $5.11 trillion as April ended.…

Hedge Fund Investing During a Time of War Like the 2020 edition, this year’s survey collides with a seismic event — a geopolitical shock wrapped around soaring inflation, rising interest rates, and weakened supply chains. Several key takeaways: Over the past five years through 2021, the Top 50 hedge funds collectively generated net annualized returns that trailed a red-hot S&P 500 by just several percentage points, but did so with significantly less risk. The group’s largely uncorrelated returns produced a 5-year Sharpe Ratio that was more than 60 bps higher than the market. Equity, multistrategy, and credit funds led the way, and nearly half of the Top 50 were smaller funds, managing less than $1 billion. As was shown in the 2020 survey, the current Top 50 funds have again preserved capital better than the S&P 500 during the first quarter drawdown. They delivered positive returns, having outpaced a declining market by more than 7 percentage points through March. This year’s survey includes interviews with leading managers and allocators from Citadel, Amundi, Generali, EFG International, NS Partners, along with six hedge fund managers who made this year’s Top 50.…

Written by: Douglas Cumming, Niclas Dombrowski, Wolfgang Drobetz, Paul P. Momtaz Abstract Crypto Funds (CFs) represent a novel investor type in entrepreneurial finance. CFs intermediate Decentralized Finance (DeFi) markets by pooling contributions from crowd-investors and investing in tokenized startups, combining sophisticated venture- and hedge-style investment strategies. We compile a unique dataset combining token-based crowdfunding (or Initial Coin Offerings, ICOs) data with proprietary performance data of CFs. CF-backed startup ventures obtain higher ICO valuations, outperform their peers in the long run, and benefit from token price appreciation around CF investment disclosure in the secondary market. Moreover, CFs beat the market by roughly 2.5% per month. Their outperformance is persistent, suggesting that CFs deliver abnormal returns because of skill, rather than luck. These performance effects for CFs and CF backed startups are driven by a fund’s investor network centrality. Overall, our study paves the way for research on what some refer to as the “crypto fund revolution” in entrepreneurial finance.…

Managed Futures Funds Continued Absorbing Investor Capital, Albeit at a Slower Rate Hedge fund net redemptions accelerated in March totaling -$35.37 billion, a reduction of -0.70% of industry assets. March’s outflows follow -$3.19 billion in redemptions in February. Nevertheless, a combination of new market entrants and an aggregate $18.24 billion trading gain for the month brought total industry assets to nearly $5.14 trillion as March ended.…

Written by: Douglas Cumming, Pedro Monteiro Abstract This paper examines the causes and consequences of hedge fund investments in exchange traded funds (ETFs) using U.S. data from 1998 to 2018. The data indicate that transient hedge funds and quasi-indexer hedge funds are substantially more likely to invest in ETFs. Unexpected hedge fund inflows [outflows] cause a rise [reduction] in ETF investments, and the economic significance of unexpected flow is more than twice as large for transient than quasi-indexer hedge funds. Expected hedge fund flows are statistically unrelated to ETF investments on average. When ETF investment is accompanied by an increase in unexpected flow, hedge fund alphas are higher. When ETF investment is accompanied by an increase in expected flow, hedge fund alphas are lower. The data are consistent with the view that hedge fund ETF investment unrelated to unexpected flow is an agency cost of delegated portfolio management.…

Managed Futures Funds Suddenly Back in Vogue and in the Money The hedge fund industry was unable to build much momentum on January’s net inflows. February saw broad trading losses and redemptions that collectively led to marginal net outflows of -$3.19 billion and a reduction in industry assets of -0.07%. Nevertheless, BarclayHedge’s model indicated an increase in industry AUM to $5.04 trillion—a result driven by a significant number of funds coming online in the first months of the year. However, things looked very different in managed futures funds’ corner of the world in February. CTAs swung back to net inflows with net inflows totaling +$2.93 billion, increasing industry assets by nearly a percentage point. Moreover, industry inflows were buoyed by increasing interest in all four CTA subsectors.…

Written by: Youssef Louraoui Abstract This research article aims to analyze the All-Weather strategy advocated by the very famous hedge fund manager Ray Dalio. Through an analysis of nearly 10 year of market data, we have selected ETF funds to replicate the investment principle by using a classic approach. We present the different results that suggest an overall performance that converge with the original analysis proposed in the Bridgewater Associates (2009) research paper that shows the benefits of the All Weather approach on the overall portfolio risk/return trade-off.…

January Investor Behavior Strikes Cautiously Optimistic Tone The hedge fund industry resumed attracting capital in January, scooping up $11.29 billion in new assets, good for an increase of 0.24% in total industry assets. A -$117.92 billion trading loss for the month left total industry assets at the $4.80 trillion mark as January closed. “End of year profit-taking, tax-harvesting and rebalancing in December 2021 broke an impressive nine-month run of net inflows to the hedge fund industry. Happily, January marked a return to net inflows, albeit in a somewhat more circumspect manner: Investors gave over an additional $11.29 billion to managers on the month,” observed Ben Crawford, Head of Research at BarclayHedge. “It is notable, however, that January 2022’s net inflows were less than 40% of the industry’s uptake a year ago and also well below the mean monthly inflow from 2021.”…

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Fourth Quarter Market and Performance Update The S&P 500 soared nearly 29% in 2021, nearly half of which was generated just in the 4th quarter in spite of clear threats to growth. It was during these last 3 months of the year when the gap between the index and the Top 50 Hedge Funds drastically expanded from nearly 5% to more than 18%. While most of the 50 sustained their historical annualized returns, two basic factors drove last year’s performance gap. One: the 10 largest contributors to the S&P 500’s returns were responsible for more than one-third of the index’s total gains. Two: the reversal in fortunes suffered by a handful of veteran hedged equity and global macro managers who had a long history of consistent solid returns. This report will explore why this occurred. Note: two thirds of the 4th-quarter gains linked to the index's top contributors’ were lost during the first 7 weeks of 2022 —before Russia invaded Ukraine.…

Written by: Morad Elsaify Abstract Different investors hold different portfolios. To explain this phenomenon, I build a model in which investors have different information processing capabilities. The model predicts that highly capable investors specialize in factor timing, hold more volatile and dispersed portfolios, and reduce average risk premia and volatility. Using novel empirical measures of investors’ capabilities and information choices, I find that hedge funds are the most capable investors, while insurance companies and pension funds are the least. Variation in factor timing ability is the primary driver of these differences. Investors’ portfolios exhibit properties consistent with the model’s predictions. Using a demand system approach, I show that hedge funds have the greatest per-dollar impact on expected returns, shrinking expected returns in the factor zoo by nearly 40% per $1 trillion of invested capital.…

December Hedge Fund Outflows Merely Accentuate a Year of Spectacular Investor Interest After nine consecutive months of inflows, the hedge fund industry saw funds flow out of the sector in December with -$20.4 billion in net redemptions. December’s redemptions represented -0.44% of hedge fund industry assets. A $39.8 billion trading profit in December brought total industry assets to nearly $4.80 trillion at year end.…

Written by: Sara Ali, Ihsan Badshah, Riza Demirer Abstract Utilizing a dataset of 1,899 U.S. hedge funds, we present evidence of anti-herding behaviour among hedge fund managers in the U.S. Hedge funds anti-herd primarily based on fundamental information and irrespective of market volatility and credit deterioration conditions although funding illiquidity has a stronger effect on the formation of anti-herding behaviour across the majority of hedge fund schemes analysed. Interestingly, however, we observe a greater deal of heterogeneity across the different hedge fund categories, particularly during crisis periods, with certain hedge fund schemes including Convertible Arbitrage, Equity Market Neutral and Fixed Income Arbitrage experiencing herding driven by the COVID-19 induced market uncertainty. More importantly, we document significant economic implications of anti-herding and show that hedge funds associated with high degree of anti-herding earn significantly higher excess returns over those with low degree of anti-herding, particularly in the intermediate and long horizons up to one year. At the same time, hedge funds that anti-herd experience greater idiosyncratic volatility in subsequent periods, presenting a novel perspective to the relationship between anti-herding, idiosyncratic volatility and expected returns. While the finding of antiherding in the hedge fund industry is not unexpected as the main attraction of hedge funds is to devise proprietary trading strategies that is based on private information, our findings provide novel insight to the link between idiosyncratic volatility and expected returns in the context of anti-herding in the hedge fund industry.…

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Global Hedge Fund Assets Reach $4.69 Trillion in November as Most Regions See Inflows The hedge fund industry extended its monthly inflow streak to nine consecutive months in November bringing in $19.3 billion in new assets. November’s inflows represented 0.41% of hedge fund industry assets. With the addition of November’s inflows, the hedge fund industry has added $199.8 billion in new assets over the nine-month period. A trading loss of nearly -$40.0 billion during the month brought total industry assets to nearly $4.69 trillion as November ended.…

$4.66 Trillion Industry Rewarded with $26.5 Billion More to Manage The hedge fund industry posted inflows for an eighth consecutive month in October, attracting $26.5 billion in new assets, equivalent to a 0.59% jump in industry assets. Over the eight-month run, Hedge Funds have packed on a total of $180.5 billion in new AUM. $44.0 billion in monthly trading profits pushed total hedge fund industry assets to more than $4.66 trillion as October ended.…

Third quarter volatility ended up sending many trends sideways, leaving the market and the hedge fund industry flat for the period. Meanwhile, hedged equity, macro, and emerging market managers helped the Top 50 funds add nearly two full percentage points during the quarter. This select group outperformed the BarclayHedge average hedge fund return by 2.3% through the first 9 months of 2021, narrowing the amount by which it trails the market.…

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The 2021 hedge fund survey published in June, which ranked the 50 top-performing funds over the trailing five years through 2020, found as a group they continued to outperform their peers and kept pace with the market during the first quarter. Through the 2nd quarter, the Top 50 again outperformed the hedge fund industry, led by distressed securities and hedged equity managers. But a relentless bull market surged ahead, ignoring inflation fears, unanticipated rise in 10-year Treasury prices, a flattening yield curve, and a rising dollar--factors that weighed on fixed-income, credit and macro strategy returns.…

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Written by Francois-Serge Lhabitant and Denis Mirlesse for EDHEC Business School…

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Click the link below to view an abstract of this month's featured industry research.…

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Fewer than half of hedge fund managers currently consider environmental, social and governance (ESG) factors when selecting equity securities for their portfolios. But, of those that do take ESG into account, ESG ratings factored in the inclusion of more than half the assets currently in their portfolios. The significant role ESG ratings play in a significant number of investment decisions is the key takeaway from the latest Barclay Hedge Fund Manager Survey, a quarterly report on the sentiments of professionals in the alternative investments sector. Other significant findings include: Hedge Fund Managers who consider ESG factors in their investments will allocate well over half their assets next year based on ESG rankings. Most managers using ESG ratings do so to screen candidates for both Long and Short positions. Governance is the factor weighed most heavily by those managers using ESG scores. On average, managers considering ESG factors in their investments have been doing so for nearly six years. Here are the survey’s detailed findings about hedge fund managers’ consideration of ESG factors: Q1: Do you currently take ESG factors into consideration when selecting equity securities for portfolio inclusion? Q2: How long have you been taking ESG factors into consideration when making an investment? On average, managers considering ESG factors in equity investment decisions have been doing so for 57 months. Survey respondents included managers who’ve just begun considering ESG factors to many who’ve applied them to investment decisions for more than eight years. While the concept of “socially responsible investment” has a longer history, the introduction of considering more specific environmental, social and governance factors in investment decisions dates to the early 2000s. Q3: What percent of your assets are currently allocated based on ESG ratings? Of those considering ESG factors in equity investment decisions, on average 52% of assets are currently allocated based on ESG ratings. Among those surveyed, 41% of respondents indicated that ESG ratings factored into 100% of their asset allocations. While several of those who indicated ESG ratings factored in 100% of their allocations are also among those who’ve been considering ESG factors the longest, there were some managers who’ve considered ESG ratings only recently. Clearly, they’ve decided to go all-in with their ESG-based investment strategies from the start. Q4: What percent of your assets did you allocate last year based on ESG ratings? On average, among those considering ESG factors, 42% of last year’s asset allocations were based on ESG ratings. Responses ranged from 0% of allocations to the several respondents indicating they allocated 100% of assets based on ESG ratings. It would be interesting to see if the average increases in coming years, and whether more hedge fund managers reach the 100% allocation rate. Q5: What percent of your assets do you anticipate allocating next year based on ESG ratings? In fact, respondents’ allocation plans for next year indicate that the percentage of equity investments based on ESG ratings is likely to increase. Respondents indicated that on average 58% of next year’s allocations will be based on ESG factors, a significant increase from last year’s 42%. The trend is consistent with reports that ESG investing grew at record levels during this year’s first quarter. Q6: If you are using ESG considerations in your security selection process, how are you implementing those considerations? Of those employing ESG factors in their security selection process, a considerable majority – 61.5% — do so to screen candidates for both Long and Short positions. Slightly more than a third – 38.5% — do so solely to screen candidates for Long positions. No respondents reported using ESG factors solely to screen candidates for Short positions. Q7: If you use ESG scores for selecting Short candidates, which ESG factors do you weigh most heavily? Governance is far and away the ESG factor weighed most heavily by investors considering Short candidates. Of those surveyed, 61.1% chose governance as the most significant ESG criteria in considering Short candidates, while 27.8% said they weigh environmental factors most heavily and 11.1% said sustainability was their top consideration. This is another finding that probably shouldn’t be surprising given the positive correlation studies have shown between governance and company performance. Q8: If you use ESG scores for selecting Long candidates, which ESG factor do you weigh most heavily? While the emphasis remains on governance for most investors viewing Long candidates through an ESG lens, the percentage is slightly less than for Short candidates at 55.6%. The emphasis on environmental factors also is somewhat less in considering Long candidates at 18.5%. The difference is in the consideration of social sustainability factors, 25.8% for Long candidates. The larger emphasis on the “S” in ESG for Long candidates may well reflect growing investor recognition of the value of intangible assets like brand or customer loyalty – and how easily the value of those assets can be eroded through reputation-damaging human capital or supply chain events or other negative social factors. Q9: Several firms publish ESG ratings/scores. Which publisher is your preferred provider? Survey respondents indicated a preference for four sources of ESG ratings and scores. Bloomberg and Sustainanalytics led the way, each favored by one-third of those surveyed. MSCI was selected by 20.8% of those surveyed and Thomson Reuters by 12.5%. While the concept of “socially responsible investment” has a longer history, the introduction of considering more specific environmental, social and governance factors in investment decisions dates to the early 2000s. Of those considering ESG factors in equity investment decisions, on average 52% of assets are currently allocated based on ESG ratings. Among those surveyed, 41% of respondents indicated that ESG ratings factored into 100% of their asset allocations. While several of those who indicated ESG ratings factored in 100% of their allocations are also among those who’ve been considering ESG factors the longest, there were some investors who’ve considered ESG ratings only recently. Clearly, they’ve decided to go all-in with their ESG-based investment strategies from the start. Note: The Barclay Hedge Fund Manager/Investor Survey went out to hedge fund professionals between June 24 and July 11, 2019. We received 70 responses from people working in hedge funds and commodity trading adviser (CTA) funds.…

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Hedge fund investors are coming to terms with the likelihood of slower economic growth and a gradual uptick in interest rates in 2019, according to the latest BarclayHedge, MPI Hedge Fund Investor Survey. Those concerns could be driving a shift in investor interest toward global macro managed futures and fixed income and away from equity strategies in the year ahead.…

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