Hedge funds have recouped 77 per cent of their 2008 losses, with 28 per cent of funds now fully recovered from their maximum drawdowns, according to a report by Credit Suisse Tremont.
While global equity markets returned 27 per cent for the year, as a whole they have regained a smaller percentage of overall losses than hedge funds and the current drawdown remains at 26.5 per cent as of 31 December 2009.
Overall, the hedge fund industry returned 18.6 per cent in 2009 marking its best annual performance in a decade and signalling the greatest performance rebound in the hedge fund industry since inception of the Credit Suisse/Tremont Hedge Fund Index in 1994.
With the exception of February when funds fell 0.9 per cent, hedge funds posted positive returns each month during the year with approximately 83 per cent of all funds ending the year in positive territory.
The performance of certain sectors including event driven, long/short equity and emerging markets drew renewed interest from investors, particularly in the second half of 2009.
Credit Suisse Tremont says many investors appear to believe the event driven sector, the largest sector and one which has con¬sistently ranked as one of the top performing index strategies over time, is poised to capitalise on opportunities created by the market dislocation. An increasing number of global mergers and acquisitions as well as corporate consolidations and restructurings could provide lucrative prospects for the year ahead.
In 2009, investors also began to turn toward liquid, directional strategies such as long/short equity and emerging markets. As equity markets rallied long/short equity managers capital¬ised on the upside, steadily increasing net exposures and securing gains in their long books to finish the year up 19.5 per cent.
An increase in risk appetite and strong equity rallies in developing nations also drove investor interest in the emerging markets strategy while optimism about global growth, rising commodities prices and positive macro economic data also buoyed sup¬port for emerging market economies. China remains a particular area of interest due to its strong growth prospects and positive macro economic data continues to support this notion. In December, the purchasing managers’ index, a key measure of China’s manufacturing activity, reached a 20-month high indicating further expansion of activity in the region.
In the year’s most significant comeback story, convertible arbitrage managers attracted a number of headlines in 2009. In the wake of a “perfect storm” of adverse market conditions during the fourth quarter of 2008 the strategy fell significantly as increased selling pressure and tightened liquidity led to pricing imbalances in the sector. These same factors worked in many managers’ favour going into 2009 and most were able to successfully capitalise on pric¬ing imbalances while low valuations and attractive credit spreads attracted new entrants to the market and eased liquidity constraints.
According to Credit Suisse Tremont, convertible arbitrage registered the strongest performance of all sectors this year finishing up 47.3 per cent through December. As markets begin to normalise Credit Suisse Tremont expects that fundamentals and security selection will gain importance in both this sector as well as other hedge fund strategies going forward.
The report also says that an estimated 58 per cent of all “impaired” assets have returned to standard liquidity status, representing a total of USD102bn. An additional USD72bn in impaired assets currently remain illiquid.
The hedge fund industry experienced net inflows of USD12bn in the fourth quarter; however, overall the industry lost USD74bn as a result of investor redemptions in 2009.
Including performance gains, current industry assets under management are estimated at USD1.5trn as of 31 December 2009.
The percentage of closed funds in the industry has dropped from 17 per cent to 13 per cent since November 2007, signifying increased investor access to some of the industry’s most in-demand managers.
In December, the Credit Suisse Tremont Hedge Fund Index gained 0.88 per cent. December’s performance leaders were convertible arbitrage, emerging markets, event driven and long/short equity.
The best performing strategy for the month was event driven which posted 2.28 per cent with managers expressing that the strategy is capturing gains on a number of fronts – event driven credit, thematic credit, special situations and robust M&A activity in the fourth quarter.
Managers were supported by strong credit markets as indicated by the Credit Suisse Leveraged Loan Index which gained 2.68 per cent and the Credit Suisse High Yield Index which had its tenth month of positive performance with 2.90 per cent in December.