Managed Futures Excel In Wake Of BREXIT Vote by eVestment

Summary

In the aftermath of the UK’s vote to leave the EU, systematic strategies, operating in both managed futures and equity-focused universes, outshined the rest of the hedge fund industry by a wide margin. Discretionary approaches, particularly in the macro universe, illustrated the diversity of opinions on the outcome of the historic vote.

Commodity prices and currency fluctuations were generally beneficial to emerging markets in June, however funds operating in Chinese markets endured a difficult environment. Commodity-focused managers continued to reward prescient investors who began allocating to the universe near the height of its nearly three-year performance drawdown.

Highlights

  • Average hedge fund industry performance was +0.86% in June, +2.09% in Q2 and +1.91% YTD 2016.
  • Managed futures funds produced their best monthly average return since 2014, +3.88%. Large funds performed even better, +4.57%.
  • Commodity funds ended Q2 +4.93%, leading all other asset classes/strategies.
  • BREXIT vote hurts funds with exposure to European equity and credit markets.

Managed Futures Excel in Wake of BREXIT Vote

Hedge funds gained +0.86% in June, ending Q2 2016 +2.09%. The industry average is +1.91% YTD 2016. Systematic strategies, operating in both managed futures and equity-focused universes, outshined the rest of the hedge fund industry by a wide margin in June, a month which included significant and unexpected short-term volatility.

In the last three and a half years, the divide between monthly returns from systematic versus discretionary strategies has only twice been wider than it was in June. Both other times occurred in 2016 (January and March), a signal of increased market volatility this year, and how each strategy has reacted.

Managed Futures

Managed Futures

Performance Overview

  • Prior to June, managed futures hedge funds had been mired in a three-month drawdown, which for the largest funds had resulted in aggregate losses near 6%. Average gains in June of +3.88% for all managed futures funds, +4.57% for >$1 billion managers, were the universes’ largest monthly increases since November 2014.
  • June’s excellent performance from managed futures hedge funds may cause investors anxiety over allocation decisions. Concerns over negative performance were likely high in the months leading up to June. In the past, flows have illustrated direct correlation with strings of monthly positive or negative returns. Now is a time when a string of elevated losses has been interrupted by very strong relative performance in a volatile environment, something investors hope for from the universe. This mix of influences makes future flows uncertain. June flow data (to be released in two weeks) will provide evidence which of the two events will impact investors decisions more.
  • Unlike managed futures funds, of which 70% of managers were positive in June, there was far greater dispersion across macro managers dealing with fallout from the BREXIT vote. Only 59% of macro managers were positive in June. Further underscoring the differences between systematic and discretionary approaches to global markets, 89% of quant-based macro funds and 86% of quant-based managed futures funds were positive in June while only 56% of discretionary macro managers navigated the events of June successfully.
  • Commodity hedge funds, which continued to receive investor interest through May, performed well again in June, +2.72%, and are among the leading segments in the hedge fund space in Q2, +4.93%, and YTD, +6.36%.
  • Hedge funds targeting distressed assets have quietly risen to be the best performing primary strategy in Q2 2016. Virtually in-line with the rebound in energy prices, distressed hedge funds have returns +4.60% in the last three months and are +3.74% YTD.
  • Multi-strategy hedge funds, which have received more assets than any other strategy over the last three years, produced mixed returns in June. Only 50% of managers were able to produce positive returns in June and average returns from larger managers were below those of smaller funds, -0.39% vs. +0.97%, respectively.

EM (ex-China) Rallied in June, BREXIT Hurt Europe Funds

Europe-focused hedge funds felt the impact of the post-BREXIT sell-off in June, producing their second worst return in over three and a half years. Emerging market hedge funds excelled, returning +3.91% in June, +4.90% in Q2 2016, and are +4.98% YTD through June 2016.

A strengthening of Brazil’s BRL versus both USD and EUR, and commodity prices enduring only a temporary decline following the BREXIT vote, resulted in a very positive month for Brazil-focused funds which led emerging markets to be among the industry leading segments in Q2 2016.

Regional Performance Overview

Managed Futures

  • Performance from both equity and credit Europe-focused hedge funds was impacted by the BREXIT vote in June. Funds operating in Europe’s equity markets fell an average of -2.63% during the month, leaving them -2.19% in Q2 and -3.28% in 2016.
  • China funds, which have seen redemption pressures rise in recent months, declined again in June and ended Q2 as the only EM country of focus in negative territory. Their average -7.52% decline YTD 2016 is the largest of any hedge fund universe this year.
  • Brazil hedge funds have endured a significantly volatile path to becoming the leading universe in the hedge fund space in 2016. With their fate seemingly so directly tied to the relative strength of the home currency, it is clear why these products have seen success in 2016. This success, however, comes after returns of -29.22% in 2015, -13.29% in 2014 and -9.81% in 2013.
  • Funds investing in both Russia and India have experienced favorable enough conditions to produce positive returns in both 2015 and 2016. Russia-focused funds in particular were +10.95% in 2015 and have just surpassed that level in 2016, +10.96%. Returns produced by Russia and India-focused funds have little correlation to one another, underscoring the differing macroeconomic factors influencing returns from each.

Sub-sector Overview

Managed Futures

  • Hedge funds focused on energy equities continued to post strong returns in June, further separating themselves from their other sector-focused industry peers. Returns of +1.74% in June put the universe +10.29% in Q2 2016 and +12.03% in 2016.
  • For healthcare and financial sector equity-focused funds, 2016 has mostly been the inverse of 2015. Both groups were industry leaders in 2015 and have thus far produced negative returns in 2016.
  • Hedge funds focused on securitized credit markets were impacted differently by the results of the BREXIT vote, depending on regional markets of focus. The majority of funds were positive in June, but aggregate returns were negative, pulled down by funds focused on European assets.