Equity hedge and event-driven strategies led the performance of hedge funds in December as the whole sector posted a fourth consecutive month of gains, making 2013 the most successful year year since 2010.
Despite rising yields and macro complexity stemming from the US Federal Reserve’s quantitative easing programme, hedge funds benefitted from high-yield credit tightening and the favourable environment for shareholder activism and corporate transactions.
Data by Hedge Fund Research (HFR) shows that the HFRI Fund Weighted Composite Index gained 1.2% in December, finishing the year with a 9.3% gain.
Meanwhile, the HFRI Fund of Hedge Funds Index gained 1.2% in December and 8.7% in the year, making it the best annual result since 2009.
The data provider describes equity hedge strategies, the best performing of the various hedge fund strategies that are tracked, as “resurgent”. Some of the hedge funds in this sector benefited from a strong environment for initial public offerings.
Event-driven funds have been helped by strategic mergers and acquisitions, and shareholder activism.
The HFRI Event Driven Index gained 1.2% in December and 12.5% in 2013 while the HFRI Equity Hedge Index gained 1.6% and 14.6%, respectively.
Kenneth J. Heinz, president of HFR, says scaling back the quantitative easing programme at the end of last year “constitutes a crucial inflection point for hedge fund strategy performance”. Heinz says market rates should normalise, which is integral to the performance of fundamental macro and equity hedge fund strategies.
Heinz predicts that the attribution of hedge fund performance between long and short portfolios is likely to shift to a more balanced distribution, a development he says will lead to a profitable mean reversion across equity and fixed income positions and contribute to a more tractable environment for macro strategies.
Lyxor came to a similar conclusion in a report, stating that “hedge funds successfully navigated the specific turn of events unfolding in 2013 and finished on a positive tone boosted by the equity rally”.
According to Lyxor’s Alternative Investment Industry Barometer, major valuation anomalies faded away last year while systemic risk receded. This cleared the way for healthier asset dispersion and a switch to more idiosyncratic pricing.
Lyxor says it expects this year to see a transition from liquidity to growth, which opens a large set of opportunities for relative value.
“A supportive macro backdrop, fundamentals back in the equation, and the return of alpha could turn next year into a sweet spot for hedge funds.” says Jean-Marc Stenger, chief investment officer for alternative investments at Lyxor Asset Management.
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