The hedge fund industry produced an aggregate return of -0.17% in March to end Q1 2015 +1.23%, compared to the S&P 500 which increased +0.96%.
Hedge fund performance returns were mixed in March amid increased equity market volatility and divergent moves in currencies, rates and commodities.
Managed futures hedge funds posted fifth consecutive monthly gain
Managed futures (MF) funds posted their fifth consecutive monthly gain in March, +0.27%. There continues to be a meaningful performance gap between large MF funds (>$1bb) and their smaller peers. In 2014, large MF funds returned +12.78% vs. +6.39% for smaller MF funds. In Q1, large MF funds are +7.71% vs. only +2.91% for smaller MF funds. We noted in our February asset flow summary that investors had shown a meaningful preference for allocating to this group of large funds in the first two months of 2015 as positive sentiment returned to the universe.
There was some divergence of returns within the event driven universe in March as activist strategies produced negative returns during the month, -0.58%, while the overall event driven universe was +0.45%. The primary reason for the difference was due to positive returns from funds with exposure to distressed assets and merger arbitrage situations.
Directional credit hedge funds declined -1.57%
The biggest losses in March came from exposure to credit markets, excluding distressed. Directional credit strategies declined -1.57% during the month, bringing Q1 returns into negative territory, -1.21%. There has been some divergence between returns from larger credit funds (-0.66% in March, -0.04% in Q1) compared to smaller credit funds (-1.12% in March, -0.86% in Q1), but recent elevated losses appear to be coming from regional exposures to European markets. Credit funds focused on European markets have produced an average return of -4.87% in Q1.
Long/short equity funds ended Q1 outperforming the S&P 500 for the first quarter since Q4 2012. It was the first time L/S equity funds outperformed the S&P 500 in a quarter when both were positive since Q1 2007. The universe appears to have been consistently reducing long exposure for several months. Since August 2014, average long exposure has declined from 97% to 90% entering March.
Emerging markets exposure continues to be a net negative impact for the industry in 2015, -0.51% in Q1 after posting an average decline of -2.71% in 2014. There were significant deviations of returns by country in Q1 with China funds returning +8.35% and Brazil funds -14.39%. Funds focused on India have hit a volatile patch, declining -3.52% in March, but remaining +2.35% in Q1.