Flows & Liquidity – Shorter Version HF alpha is back (J.P. Morgan)

February 2014

KEYWORDS: leverage, Hedge Fund Research, hedge fund replication, Hedge Fund Performance, bonds, Equity markets, Ukraine, European Union, Lehman Brothers, outflows, ETFs, assets under management

Authors:

Nikolaos Panigirtzoglou, Matthew Lehmann, Jigar Vakharia

Organizations:
  • J.P. Morgan

Summary:
  • Hedge funds outperformed both a 55/45 bond/equity portfolio as well as HF replication strategies in 2013, following underperformance in previous years.
  • And the above linear performance measures understate the convexity advantage of HFs.
  • Total HF capital increased by $376bn in 2013 to a new high of $2.63tn, helped by $64bn of net inflows according to HFR.
  • As % of the total universe of bonds and equities globally, the HF share rose to 2.6% in 2013, which is above the previous 2.3% peak seen just before the Lehman crisis.
  • HF leverage metrics remain well below 2007 peaks.
  • Cross border flows showed a decline in the preference for US vs. foreign stocks towards the end of the year.
  • European banks’ exposure to Ukraine represents a small portion of their total exposure to Eastern Europe.
  • Equity ETFs continued to bounce back, unwinding most of January outflows.

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