Event-driven hedge funds delivered the highest levels of alpha in the first six months of this year, suggesting managers were more skillful than those in other strategies, such as equity hedge, where funds were driven more by beta.
The highest level of global mergers and acquisitions since 2007 helped event-driven funds deliver alpha of 2.5% on total index returns of 4.3%, meaning over half the funds’ returns were attributable to manager skill.
Beta returns – the returns or losses generally attributable to broad market movements rather than a manager’s investment skill – came more into play with equity hedge funds, which take long or short positions in stocks. While average equity hedge total returns were 2.6% in the first six months, average alpha was negative at -0.8%.
However, some equity hedge managers managed to deliver both high alpha of 7.6% and total returns of 12%.
BlackRock, the fund management company that carried out the research, says the data shows the importance of manager selection.
“The total return profile across hedge fund strategies is different from this time last year, but the data confirms the key issue for investors in hedge funds remains identifying managers with the most skill,” says David Barenborg, head of hedge fund manager research at BlackRock Alternative Advisors. Last year, the gap between underperforming managers and outperformers was wider than this year.
Barenborg adds: “Many average and below-average equity hedge funds performed well on a total returns basis in 2013, but in many cases, this was driven by the beta in their portfolios, rather than manager skill, or alpha. This has been made more evident in the less bullish equity environment we have seen this year.”
Equity hedge is one of four categories of hedge fund strategy in the BlackRock research, along with event-driven, macro, and relative value.
The difference between the best and worst performing hedge funds across the board decreased during the first half (H1) of 2014. Top decile hedge funds returned 11%, compared to losses of -5% for bottom decile hedge funds. In contrast, the 2013 inter-decile range was between 15.5% and -6.5%.
Relative value, along with event-driven, was also a higher alpha performer on average across hedge fund strategies.
Event-driven and relative value funds are expected to continue with higher performance. Barenborg says: “Looking ahead, continued policy uncertainty, volatility and potential market mispricings will continue to provide opportunities for event-driven and relative value hedge funds in particular.”
The research examined the H1 2014 returns of 1,549 hedge fund managers, separating returns into ‘traditional beta’, ‘non-traditional beta’ and ‘alpha’.
©2014 funds europe
