Hedge Funds Confound Expectations in 2014

Several hedge fund strategies surprised to the up and downside in 2014 despite conditions suggesting they should do otherwise, according to data from Lyxor.

Although conditions were perfect for event-driven strategies, as a group they lost 2.3% over the year, the asset manager said.

“Strategies with lower market directionality and/or with a quantitative bias should continue to do well in the quarters ahead.”—Lyxor“Event-driven disappointed,” the company said in a report on 2014 asset class performance, “despite the fact that conditions were in place to achieve a strong year, as mergers and acquisitions (M&A) and divesture activity were supportive.”

Totalling $3.5 trillion, M&A activity was up 47% year-on-year, according to Thomson Reuters. 2014 was the sector’s strongest year for deal-making since 2007, the data provider said.

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Separately, CTAs outperformed expectations with an overall 18.2% return over the year. Lyxor put this down to the strategy largely ignoring “the views of the crowd”.

One strategy that went with the consensus view was long/short equity. Variable bias ended the year up 1.6%, while market neutral players saw funds up by 7.9%.

This momentum should continue into 2015, Lyxor said: “We believe these strategies with lower market directionality and/or with a quantitative bias should continue to do well in the quarters ahead.”

Record levels of dry powder and an all-time high number of funds seeking capital will pose serious headwinds for private equity fund raising in 2015, according to Preqin.

The data firm reported that 2,252 private equity funds around the world were seeking an aggregate $800 billion from investors at the end of 2014. Funds that have raised capital are holding a collective $1.2 trillion of cash to be deployed.

In addition, the number of private equity funds that closed in 2014 having raised sufficient investment capital fell to 977, the lowest figure since 2009.

Preqin’s report said it was “likely that managers may continue to struggle to hold a final close in the coming year” given these challenges.

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Christopher Elvin, head of private equity products at Preqin, said the low number of closures had been a “stumbling block” for the growth of the asset class.

“It is evident that the private equity fundraising market is still in a state of bifurcation,” Elvin said. “The largest, brand-name managers are receiving the majority of investor commitments, with smaller managers—particularly first-time funds—finding it difficult to raise capital.”

Funds from managers new to the private equity sector accounted for 7% of the $486 billion raised in 2014, the same proportion as in 2013.

In contrast, established names dominated the list of the biggest funds closed last year. The largest single fund was Hellman & Friedman VIII, a buyout fund run the eponymously-named San Francisco, California-based firm. Blackstone, Bain Capital, and Permira all closed funds with more than $5 billion of investment capital raised.

Despite the headwinds facing the private equity sector, Elvin said managers were spending less time on the road raising capital: Funds closed in 2014 on average took 16 months to hit their fundraising targets, compared with more than 18 months for funds closed in 2013.

Elvin also highlighted positive investor sentiment towards private equity. Preqin’s survey of institutional investors found that more than half were planning to make their next investment in the sector in the first half of 2015.

Private equity investor sentiment