After the trials and tribulations of the previous year, when the world and his wife seemed to be lining up to attack hedge funds and the whole value proposition of high-cost active managers, the industry needed to have a good year last year.
So the upturn in 2017 was both welcome and necessary. There are still challenges ahead, to be sure – and some investors still have their reservations.
But better performance always tends to lift the mood music and all the various critics and sceptics have gone noticeably quieter of late, even if they have not necessarily gone away.
Overall, hedge fund performance in Europe was the best for four years, with the EuroHedge Composite Index posting its highest annual return since 2013.
Equity strategies led the way against a backdrop of buoyant stock markets around the world and robust global economic growth – with the median indices for global, European, emerging market, Asian and US equity funds all achieving double-digit returns on the year.
But there were strong overall returns in a number of other investment strategy areas as well – notably in event-driven, credit and emerging market debt.
And while the environment was a good deal tougher for funds in strategies such as macro and managed futures, there were still some impressive performances by individual managers in those areas too.
As the final line-up of nominees for our annual EuroHedge Awards this month showed, there was no shortage of outstanding risk-adjusted performances by European hedge funds last year – across a wide range of strategies and asset classes.
Many of the nominees – and winners – are familiar names, who have been producing strong results for their investors over many years, through a variety of market and macro environments.
But many others are newer names in the industry – whose success underlines the continued spirit of vitality and regeneration in this business, which is such a key part of its culture and resilience.
So the hedge fund community starts 2018 on the front foot, which is a far cry from 12 months ago – and there is every reason to hope and expect that this could and should be another good year.
The long-lasting bull run in equities may or may not persist. Bonds may or may not finally roll over into the long-predicted fixed-income bear market. And there will no doubt be changes and challenges in other asset classes as well.
But it would be no bad thing if the industry were to face more unsettled and changeable market conditions in the year ahead – as that would pose a much-needed opportunity to show that hedge funds can perform in difficult times as well as in more benign markets.
Performing well when equities are doing well is fine. But it is the periods where hedge funds perform well when equities and other asset classes are not doing well that serve to draw attention to the value that alternative asset managers can deliver.
The pressure on, and from, investors to redeem from hedge funds has certainly abated over the past 12 months or so. Overall global hedge fund assets are at peak levels of just over $3 trillion. Some of the best-performing funds and firms in 2017 have seen significant inflows. But there is no sign yet of any sustained surge in investor allocations and capital flows back into the industry as a whole.
Many investors are still sitting on the fence, and they will probably not come down off it until trouble hits – by when, if the past is any kind of guide to the future, it may well be too late.
Memories of 2008 are still fresh, even if the reality of that traumatic year is that hedge funds protected investors’ capital far better than most other types of investment.
But memories of 2011 – which was arguably a worse and more disappointing year for the industry, given that hedge funds lost money in markets that whilst volatile and stormy were not a patch on the chaos of 2008 – are also strong.
So it will inevitably take more than one good year of performance to convince the doubters that the tide has turned. A sustained period of superior returns is what the hedge fund industry now needs to deliver. But 2017 was a good first step, and it has provided a solid and positive base for the year ahead.