Key Takeaways
- • Hedge funds declined 3.35% in 2018, marking one of the weakest years since the 2008 financial crisis, reversing an 8.5% average return achieved in 2017.
- • North American hedge funds recorded their worst post-crisis month in December 2018, declining 3.29%, as the S&P 500 fell 9.18% amid Federal Reserve interest rate hikes; the Eurekahedge North America Long Short Equities Index dropped 4.63%.
- • Asian hedge funds suffered the steepest losses, declining 10.66% for the full year, while European managers fell 0.9%, reflecting regional equity market weakness and growth concerns across geographies.
- • Cryptocurrency-focused hedge funds collapsed 68.88% in 2018, including an 8.74% December decline as Bitcoin fell to nearly $3,000; conversely, macro hedge funds gained 1.56% in December and AI/machine learning strategies rebounded with 2.17% gains.
- • The hedge fund industry experienced $22.2 billion in net investor redemptions and $15.9 billion in performance-based losses during 2018, signaling significant capital flight amid market volatility and underperformance relative to equity benchmarks.
Summary
The hedge fund industry concluded 2018 with its weakest annual performance since the 2008 financial crisis, with the Eurekahedge Hedge Fund Index declining 3.35% for the year. This marked a sharp reversal from 2017, when the industry generated an average 8.5% return. The deterioration reflected broad market turmoil, particularly in December, when hedge funds declined 0.82% for the month while significantly outperforming the MSCI AC World Index's 7.61% decline—a relative bright spot amid broader equity market distress.
December 2018 proved especially punishing for North American hedge funds, which posted their worst month since the 2008 crisis with losses of 3.29%. The Eurekahedge North America Long Short Equities Hedge Fund Index fell 4.63% for the month as the S&P 500 declined 9.18%, driven by market anxiety surrounding aggressive Federal Reserve interest rate policy. Asian markets fared worse, with the Eurekahedge Asia ex Japan Hedge Fund Index declining 2.82% in December and suffering full-year losses of 10.66%, reflecting concerns over slowing regional economic growth. European hedge fund managers weathered the period relatively better, declining 0.9% for the year.
Performance diverged sharply across strategy mandates. Macro hedge funds demonstrated notable resilience, gaining 1.56% in December, while event-driven strategies declined 2.78%. Commodity Trading Advisors (CTAs) and managed futures funds gained 0.93% in December despite weakness in the energy sector, though these strategies recorded a 3.17% annual decline after experiencing $22.2 billion in net investor redemptions and $15.9 billion in performance-based losses. Funds employing artificial intelligence and machine learning strategies rebounded in December with a 2.17% gain, ending a streak of losses, though the category still finished down 2.97% for the year.
The most dramatic underperformance emerged in cryptocurrency-focused hedge funds, which declined 68.88% in 2018. The Eurekahedge Crypto-Currency Hedge Fund Index fell 8.74% in December alone as Bitcoin plummeted to nearly $3,000. This collapse underscored the extreme volatility in emerging alternative asset classes and the severe impact of cryptocurrency market dysfunction on specialized hedge fund strategies.
December 2018 proved especially punishing for North American hedge funds, which posted their worst month since the 2008 crisis with losses of 3.29%. The Eurekahedge North America Long Short Equities Hedge Fund Index fell 4.63% for the month as the S&P 500 declined 9.18%, driven by market anxiety surrounding aggressive Federal Reserve interest rate policy. Asian markets fared worse, with the Eurekahedge Asia ex Japan Hedge Fund Index declining 2.82% in December and suffering full-year losses of 10.66%, reflecting concerns over slowing regional economic growth. European hedge fund managers weathered the period relatively better, declining 0.9% for the year.
Performance diverged sharply across strategy mandates. Macro hedge funds demonstrated notable resilience, gaining 1.56% in December, while event-driven strategies declined 2.78%. Commodity Trading Advisors (CTAs) and managed futures funds gained 0.93% in December despite weakness in the energy sector, though these strategies recorded a 3.17% annual decline after experiencing $22.2 billion in net investor redemptions and $15.9 billion in performance-based losses. Funds employing artificial intelligence and machine learning strategies rebounded in December with a 2.17% gain, ending a streak of losses, though the category still finished down 2.97% for the year.
The most dramatic underperformance emerged in cryptocurrency-focused hedge funds, which declined 68.88% in 2018. The Eurekahedge Crypto-Currency Hedge Fund Index fell 8.74% in December alone as Bitcoin plummeted to nearly $3,000. This collapse underscored the extreme volatility in emerging alternative asset classes and the severe impact of cryptocurrency market dysfunction on specialized hedge fund strategies.
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