Market volatility takes its toll on hedge funds, as returns slip to lowest levels since 2011

Madeline Ratcliffe
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Hedge funds had their worst performing year last year since 2011, posting returns of 2.02 per cent, according to the latest data from Preqin.

December was a tough month, with the funds on Preqin's all strategies benchmark posting negative returns of 0.4 per cent on average, bringing the total to five months with negative returns last year.

However, funds performed considerably better than 2011's low, when average returns were negative: down -1.77 per cent for the year.

A recent survey of institutional investors by Preqin showed that 32 per cent are planning to cut their hedge fund holdings, compared to only 25 per cent planning to increase them.

The survey also revealed one in three investors were disappointed by returns from their hedge fund portfolio in 2015 and were less confident about future returns than a year ago.

Amy Bensted, head of hedge fund products at Preqin, said:

The hedge fund industry has been exposed to much of the financial turmoil of 2015, from the continuing fall in commodities prices to the loss of confidence in the Chinese stock market. These have created very difficult conditions for many firms, and left some investors questioning the ability of the industry to properly hedge losses in other markets.

Funds that use commodity trading advisers (CTAs), which focus on using futures contracts, in particular have suffered, posting negative returns in seven of the past 12 months, the highest in any calendar year since Preqin began tracking the industry. CTA funds finished down 0.49 per cent, compared to closing up 10.86 per cent the year before, largely thanks to a lack of liquidity in the market.

During such a tumultuous year it is no surprise that volatility funds recorded annual returns of 5.06 per cent.

Bensted added: "However, while the industry as a whole may be struggling to make gains, there are funds who have posted encouraging returns throughout the year. The challenge for investors in 2016 will be to identify which funds can offer real growth on their invested capital.”

Pershing Square, the hedge fund owned and run by Bill Ackman, announced earlier this month it made a 20.5 per cent loss in 2015, thanks to the battering Valeant Pharmaceuticals, one of its biggest holdings, took last year.

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