Hedge Funds Outperform Underlying Markets, Up 1.12% In April by Eurekahedge

Hedge funds outperformed underlying markets during the month, and were up 1.12%1 in April while underlying markets as represented by the MSCI World Index2 ended the month up 0.67%. Emerging market managers continued to perform well during the month supported by resilient oil and commodity prices which are helping to inject some investor optimism. A confluence of factors has helped oil gain some support despite ineffective talks between OPEC members while rather encouraging Chinese macro data and stimulus measures have also aided in providing a better outlook for the Chinese economy, resulting in the climb in prices across the commodity space.

However, subsequent improvements in US GDP figures, an uptick in the US dollar (which has depreciated against most developed and emerging market currency pairs) and oversupply in the oil market vis a vis build up in US inventories and the Iranian factor, could potentially upset the delicate balance that has materialized over the past few months in the markets. Barring any formal agreement between OPEC and non-OPEC members, oil could yet again drive the markets lower.

Hedge funds – Below are the key highlights for the month:

  • Hedge funds were up 1.12% during the month, and 0.62% year-to-date. In April, Latin American mandates contributed to strong gains for managers, up 4.17%. On a year-to-date basis, Latin American mandated hedge funds were up 9.87% – their best year-to-date returns over the past 10 years.
  • Distressed debt hedge funds posted the best returns during the month of 1.83% as higher oil and commodity prices lent some support to the valuations of managers??underlying assets.
  • Japan mandated hedge funds were the worst performers during the month, down 1.53% and 4.31% year-to-date as the Bank of Japan decided to hold policy steady for the moment.
  • Among developed market mandates, North American and European managers grew by 1.51% and 0.45% respectively, while Japanese managers lost 1.53%.
  • Emerging market managers posted their second consecutive month of gains, up 2.57% as underlying Eastern Europe & Russia and Latin America mandated hedge funds jumped 3.42% and 4.17% respectively in April.
  • The Eurekahedge Asia ex-Japan Hedge Funds Index was up 1.28% in April. Greater China hedge funds, a heavyweight of the index declined 0.34% during the month while India focused managers were up 1.89%. On a year-to-date basis, 63% of Asian managers are in the red this year, compared with only 16% over the same period last year.

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Main Indices

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Regional Indices

All regional mandates were up in April with the exception of Japanese managers who were down 1.53% during the month. The Nikkei 225 declined 0.55%, partly due to the Yen rally as a result of the Bank of Japan decision to leave monetary policy unchanged at its last meeting. On the other hand, Asia ex-Japan managers were up 1.28% with India dedicated mandates posting strong gains. Greater China managers lost 0.34% as Chinese markets ended April in the red with the CSI 300 Index declining 1.85% during the month. On a year-to-date basis, Greater China dedicated hedge funds are down 5.02%, an over 10% outperformance compared to underlying markets as the CSI 300 Index plummeted 15.39% in the first four months of 2016. Meanwhile, the climb in oil and commodity prices continue to support the performance of emerging market managers with the Eurekahedge Emerging Markets Hedge Fund Index climbing 2.57% during the month. Underlying emerging market mandates posted the best gains with Eastern Europe & Russia and Latin American mandated hedge funds reporting positive returns of 3.42% and 4.17% respectively. Among developed mandates, North American and European managers were up 1.51% and 0.45% during April, outperforming the MSCI North America Index and the MSCI Europe Index which were up 0.77% and 0.86% respectively.

On a year-to-date basis, the Eurekahedge Emerging Managers Hedge Fund Index is up 3.11% while its underlying Eastern Europe & Russia and Latin American mandated hedge funds are up 11.28% and 9.87% respectively – the strongest gains among all regional mandates. On the other hand, Asian managers continue to languish for the year with Japanese managers losing 4.31% and Asia ex-Japan managers down 1.69% as of April 2016 year-to-date. Underlying Greater China and Indian managers declined 5.02% and 1.18% respectively.

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Strategy Indices

All strategic mandates were up in April with distressed debt hedge funds posting the best gains of 1.83%, with help from a strong showing in the US and European high yield sector during the month. Higher oil and commodity prices have managed to lend some support to valuations which has resulted in gains for distressed debt managers. Macro mandated hedge funds were also up during the month gaining 1.74% – some macro funds with long exposure into the Yen reaped gains during the month as the Bank of Japan inaction sent the currency soaring. Meanwhile, indications of a potential rate cut from the Australian central bank led the Aussie dollar lower – short exposure into AUD/USD were also among profitable moves for some macro managers. Long/short equities were also up – gaining 1.44% with exposure into underlying oil and mining sectors as well as ‘cyclicals’ witnessing positive gains during the month despite hits and misses of corporate earnings in the first quarter. On a year-to-date basis, CTA/managed futures hedge fund managers were up 2.32% followed by macro hedge funds with gains of 1.65%. Distressed debt managers also had a strong year-to-date performance and were up 1.54%.

Among the suite of CBOE Eurekahedge Volatility Indexes, short volatility managers pocketed good gains of 0.75% during the month as overall volatility levels remained low throughout April. Despite that, the CBOE VIX climbed slightly towards the month end. Relative value volatility hedge funds were also up during the month, gaining 0.50%. On the other hand, long volatility managers posted the steepest decline, down 1.71% as the outlook on the global economy improved and volatility levels remained subdued. On a year-to-date basis, relative value volatility managers were up 2.35% followed by short volatility managers with gains of 0.83%.

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1 Based on 26.87% of funds which have reported April 2016 returns as at 10 May 2016

2 MSCI World Index AC (Local)