When looking at hedge fund performance trends, certain macro institutional strategies previously reported by ValueWalk appear to be at play in the HSBC weekly hedge fund category reporting numbers. For instance, emerging markets are a focal point for investors – in particular the debt markets. Looking at hedge fund category performance might explain this. The hot and often little discussed topic – the increasing ineffectiveness of central bank quantitative dopamine – is on display in Japan, a trend that emerges to degrees in hedge fund sector performance analysis. And then there is “market neutral” hedge fund performance, which is mixed, that points to interesting human vs machine dichotomy.

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HSBC 7 29 Average Performance Hedge Funds, Hedge Fund Returns

Emerging market debt is a winning hedge fund strategy

A creeping trend among institutional investors, one that has been aptly noted by Credit Suisse, is the emerging interest in emerging markets. Updating previous analysis, Credit Suisse, in an article ValueWalk published Thursday, noted that emerging markets are now being considered a safe haven among institutions and that debt in these regions, with attractive yield and currency values, is becoming a preferred institutional exposure.

The sector analysis backs this up. It is the song / short credit funds working relative value plays in emerging markets that are doing well, up 5.08% year to date. The vast majority of hedge funds in this category are smaller players, mostly from $100 to $500 million in assets under management with a sprinkling of $1 billion+ plus funds. Playing the emerging market game can sometimes mean wading into lightly traded markets and taking a nimble approach to long / short ratio management. Funds with significant multi-billion heft are likely to find certain opportunities too small to move the needle.

The top winners in this category include the $145 million IP All Seasons Asian Credit Fund, up 12.50% year to date, with the $203 million Moneda Latin American Corporate Debt Fund A class nipping at their heals at 11.32% year to date. The larger $3.37 billion Schroder ISF Emerging Market Debt A/R I ACC, with an interesting 7.18% average annual return and relatively low 5.43% volatility, is currently performing above historical mean with 10.47% year to date returns.

In Japan is quantitative easing effectiveness at its end point?

Perhaps the most interesting hedge fund story to watch is the sinking impact quantitative stimulus is having in Japan. As the island nation prepares to experiment with “helicopter money” that could more directly impact the economy, noted hedge fund investors have expressed caution.

Skybridge Capital’s Ray Nolte, for instance, publicly mused that quantitative stimulus in Japan had pushed stocks to their limit. Stimulus had reached its end point in lifting asset prices and he was pulling money out of Japanese hedge funds.

Looking at the category performance one might recognize the trend.

The Equity Diversified category trading in Japan is keeping company with the worst performing categories year to date, down 12.22%. Some of the funds finding a challenging market environment as the impact of stimulus wears off include the $110 million SR Global Fund H – Japan, down -19.9% on the year. The SFP Value Realization fund, likewise, isn’t realizing as much value in 2016, down -16.86%

Market neutral is mixed and managed futures performance is a yawn after Brexit but still positive

A category with interesting mixed performance is the “Market Neutral” strategy, which is separate from managed futures.

Positive performance is emanating from the Market Neutral Discretionary Global, which is up 4.51% year to date. The $1.2 billion Marshall Wace MW Market Neutral Tops A USD is out-pacing category the benchmark up 5.03% on the year. With 8.03% average annual returns and low 6.30% volatility, the fund’s long term performance is a benchmark beater on several levels. The issue could be its worst drawdown -- occurring when “market neutral” was needed most. Leading up to and during the financial crisis, the strategy was down -15.98% from June to November 2008, but then turned around in the middle of crisis.

While the humans in Market Neutral Discretionary are doing well, the computers are taking it on the chin. The Market Neutral Systematic Global category is down -6.18% year to date, with a finance industry leader leading the way. The $893 million Blackrock 32 Capital Master Fund Spc, down -8.48% on the year, is leading in negative performance.

As Morgan Stanley positioning analysis shows an increased hedge fund appetite for European stocks, the Market Neutral Equities Diversified Europe category is in the midst of a drawdown.

The category is -4.86% year to date with a discretionary component of the Man AHL team leading the way to the downside. Yes, its GLG – those that said managed futures-based Man AHL was on the wrong side of history – that is down year to date. The $819 million GLG European Equity Alternative Class IN Eur sinking by -5.01%. The fund has a rather US Treasury Bond market-like performance of 1.98% average annual performance with low 5.01% volatility. The -10.37% worst drawdown that took place from February to October of 2014, however, did not correlate to bond market performance to the same degree during that period.

Considering “market neutral,” the Managed Futures Systematic Global category, up 3.67% on the year, is experiencing yawning category performance in the wake of Brexit volatility. Based on modeling, trade triggers generated immediately after the Brexit vote have delivered mixed results and a pause in trend momentum in key markets has stalled performance.

The interesting category to watch is the Macro Systematic Global, which is up 11.72% year to date. Leading pack is $1.3 billion Quantedge Global Fund, up 40.43%. Hang on to your hat with this investment. The Average 26.66% annual performance with 30.28% volatility is likely to have interesting mean reversion characteristics. The worst drawdown is also interesting, from February to October 2008 the fund was down -44.65% but then escaped from the negative column in the teeth of the financial crisis.