Increased volatility and concerns over the sudden drop in the price of oil prompted a net outflow of investments from hedge funds in the fourth quarter, although performance gains held, leaving the funds poised to end the year with sizeable profits.
In the fourth quarter to date, hedge funds suffered a net outflow of $1.5 bn even as performance gains boosted overall hedge fund capital by $29 bn to $2.85 trn, according to data from industry analysis firm Hedge Fund Research (HFR). About 60 percent of all hedge funds experienced inflows while 40 percent suffered outflows.
The mixed performance of the fourth quarter comes amid global uncertainty prompted by sharp declines in the price of oil, which is affecting the profits of many energy companies and roiling junk bond markets. The drop has hurt the outlook for many oil exporting nations and the US hydraulic fracturing industry as well as prompting crashes in Russia’s ruble and other emerging market currencies.
However, hedge funds are set to end the year with a gain of 3.5 percent, according to the December 23 reading of the HFRI Fund Weighted Composite Index, HFR’s broadest measure of hedge fund performance.
Among hedge funds with a geographically specific focus, those specialized in India were by far the best performers, with the HFRI Emerging Markets: India Index soaring 44.2 percent in the year to date. India was far ahead of the Middle East and North Africa, which placed second with gains of 7.5 percent.
Funds with significant exposure to Russia suffered worst in 2014, with the HFRI Emerging Markets: Russia/Eastern Europe Index declining 20 percent in the year to date. The next-worst performer was Latin America, as the Latin America index declined 5.4 percent so far this year.
‘After several years of strong equity beta gains, falling volatility and increasing investor risk tolerance, increased volatility originating from the energy and commodity sector has been a catalyst for increases in volatility across most asset classes,’ Kenneth Heinz, president of HFR, says in a press release. ‘While the source of the volatility may evolve, hedge funds which have effectively navigated this volatility paradigm shift are likely to benefit their investors and attract new capital into early 2015.’
