Market volatility and fluctuating investor sentiment contributed to making 2018 the worst year for hedge funds in a decade.
According to the Preqin All-Strategies Hedge Fund benchmark, hedge funds finished the year with losses of 3.42%, which was the lowest return the industry has seen since 2008, and the first time it reported negative returns since 2011.
This was in stark contrast to last year, when hedge funds returned 11.41% and reported gains every month.
“A turbulent end to the year means it comes as little surprise that the hedge fund industry ended 2018 in negative territory,” Ross Ford, Preqin’s head of hedge fund research, said in a release. “While losses didn’t approach the level seen in 2008, they are still a blow to investor confidence, especially given how widespread they are. It’s no surprise that the majority of investors feel underwhelmed by hedge funds’ performance.”
Preqin also said performance difficulties among hedge funds were widespread in 2018, as 59% of hedge funds posted negative returns for the year, with 39% seeing losses greater than 5%. Only 21% of funds reported gains that exceeded 5% compared to 67% of funds earning more than 5% in 2017.
Additionally, 2018 saw a contraction in the number of active hedge fund as liquidations exceeded launches. Although there were fewer liquidations in 2018—746 compared to 1,130 in 2017—the number of funds launched fell sharply and nearly halved to 609 from 1,169. It was also the fifth consecutive year in which hedge fund launch activity has fallen, as there were 15,837 active funds at the end of 2018 compared with 15,947 at the end of 2017.
According to Preqin interviews with investors, a majority (55%) said they felt their hedge fund investments fell short of expectations in 2018, while 39% said their expectations were met, with only 8% saying their hedge fund returns exceeded expectations. In contrast, 72% reported that their hedge fund portfolios surpassed their expectations the previous year.