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A new study titled Finding Alpha conducted by Barclays’ Capital Solutions team focuses on aggregate performance in the Equity hedge fund industry over time, as well as how individual managers have performed relative to one another. Our analysis focuses on the key developments following the Global Financial Crisis and examines how external market factors, as well as portfolio management decisions, can impact returns. The team analysed performance data of more than 5,000 funds based on their holdings, surveyed 30 Equity hedge fund managers and examined various Equity sub-strategies and reviewed third-party research and publications.

Key findings:

  • Equity hedge funds’ share of the overall industry asset-under-management has been decreasing
  • Net flows into the various Equity sub-strategies seem to be driven by alpha
  • There has been significant dispersion in manager performance

Equity hedge funds, often considered a core hedge fund strategy, have seen their fair share of ups and downs as the hedge fund industry has grown. Since the Global Financial Crisis, monetary easing and rising equity markets have made it difficult for Equity hedge funds to outperform their benchmarks. Furthermore, the growth rate of Equity hedge funds since 1999 has lagged the overall hedge fund industry (9% vs. 11%, respectively), resulting in a decline in overall Equity hedge fund market share from 63% in 1999 to 46% in the first quarter of 2018.

Total hedge fund industry AUM and flows ($bn)

 

1. "Other" is composed mostly of macro (discretionary and systematic, incl. CTA) and credit / distressed strategies.

Source: HFR, Strategic Consulting analysis

The decline of Equity hedge fund market share in the post-crisis period has been driven in large part by investor allocations to non-Equity strategies. Since 2010, non-Equity strategies have received $212 billion in inflows compared to $71 billion for Equity strategies. When looking at the various Equity hedge fund sub-strategies, Long-Short is the only sub-strategy that experienced net outflows since 2010.

We reviewed performance in order to understand why certain Equity hedge fund sub-strategies saw inflows versus outflows. It is important to draw a distinction between returns driven by beta (the portion of returns attributed to broader market movements) and returns driven by alpha (the portion of returns attributed to manager skill, as opposed to broader market movements).

We see stronger inflows into sub-strategies that generated the most alpha since 2010, as opposed to the sub-strategies that have the highest total returns. This is consistent with what we hear from investors regarding their willingness to pay fees for alpha and preference not to pay for beta. The lack of flows to Sector Focused HFs despite its positive alpha was surprising, though based on another of our recent reports, Go with the Flows: Global hedge fund industry outlook, this may improve in the near future due to strong investor interest at the start of 2018.

Equity hedge fund performance and flows by sub-strategy ($bn)

Source: MSCI World, HFR, Strategic Consulting analysis

Although Equity hedge funds on average generated limited alpha since 2010, there has been significant dispersion in manager performance, as a large number of hedge funds have generated high levels of alpha. Among the 5,445 Equity hedge funds in the Hedge Fund Research® database with at least 3 years of performance data in the post-crisis period, there is a wide variation in the amount of alpha they generated.

The study reveals that 54% of funds generated positive alpha and 46% generated negative alpha. As expected, the distribution of alpha generation is positively skewed for existing funds and negatively skewed for funds that are no longer in business.

Frequency distribution of equity hedge fund alpha generation

2010 - 1Q18 Annualized Alpha, Frequency Distribution

Sample includes 5,445 Equity Hedge Funds with at least 3 years of performance data from 2010 through 1Q18.

Source: HFR, Strategic Consulting analysis

Based on our findings, we conclude that many Equity hedge funds—at least the top performers—have delivered on their value proposition and provided a differentiated source of returns in the post-crisis period. If the current market conditions persist, our study suggests that Equity hedge funds are poised to capitalize.

About Finding Alpha

Finding Alpha is Barclays’ Capital Solutions team’s second study of Equity hedge funds across a variety of factors, with an eye towards better understanding the drivers that impact performance. The objective is to help provide hedge fund portfolio managers, analysts, COOs and marketers, as well as institutional hedge fund investors, with analysis and insight into various factors that affect performance.

 

Contact the Capital Solutions team

If you are interested in the full Finding Alpha study, which is available to clients of Barclays Investment Bank, or if you would like to learn more about Capital Solutions’ services and reports, please contact strategicconsulting@barclays.com.

See more about our Capital Solutions offeringSee more about our Capital Solutions offering Important content disclosuresImportant content disclosures

Disclaimer

This article is provided for information purposes only and it is subject to change. It is indicative only and not binding. This article does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service by Barclays.

Barclays is not liable for the use made of this communication other than for the purpose for which it is intended, except to the extent this would be prohibited by law or regulation. Furthermore, Barclays is not an advisor and will not provide any advice relating to a product. Nothing in this article is intended to provide tax, legal, or investment advice.

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Go with the flows: Global hedge fund industry outlook 

See our Capital Solutions team's outlook for the hedge fund industry, with insights from their annual investor survey.

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