Activists and Distressed Hedge Funds Lead in July & YTD by eVestment

Hedge funds gained +1.89% in July. The industry average is +3.29% YTD 2016.

With global capital markets rebounding in July, the environment benefited concentrated equity-focused exposures most, but gains were prevalent across the industry. Hedge funds produced their most broadly positive month since February 2014, with 79% of all funds posting gains. Several strategies had zero constituents declining in July, and only one segment had fewer than half of its funds produce gains. Commodity-focused funds were the only segment where losses were concentrated.

Highlights

  • Average hedge fund industry performance was +1.89% in July, and +3.29% YTD 2016.
  • After broadly excelling in the post-BREXIT volatility, dispersion within managed futures resulted muted but positive July returns.
  • Commodity funds posted their third monthly decline of 2016, falling -0.61%.
  • Activist and distressed strategies surged in July to sit among industry leaders.

Summary

With global capital markets rebounding in July, the environment benefited concentrated equity-focused exposures most, but gains were prevalent across the industry. Hedge funds produced their most broadly positive month since February 2014, with 79% of all funds posting gains.

Several strategies had zero constituents declining in July, and only one segment had fewer than half of its funds produce gains. Commodity-focused funds, a favorite for investors in 2016, were the only segment where losses were concentrated. The commodity universe has been able to keep losses minimized thus far in 2016, holding these funds near the top of the industry.

Activists And Distressed Hedge Funds Lead In July & YTD

Performance Overview

Activists And Distressed Hedge Funds

  • In 2016, event driven funds have had more money removed than any strategy. Performance had been a major issue, with the universe producing negative average returns in 2015. For investors who remained, or those who focused on smaller managers, 2016 has been a much better year. The broad event driven universe has gained an average of +3.84% in 2016, after rising +1.96% in July. Funds with under $1B in AUM are +4.57% YTD.

Activists And Distressed Hedge Funds

  • Activist managers, a subset of event driven, have generally done very well this year, despite select high profile outliers. Activist strategies were +3.82% in July and with YTD returns averaging +5.04%, are among industry leaders in 2016.
  • Distressed hedge funds produced another strong month in July, returning +2.89%, which brings YTD returns to +6.26%, the highest among any primary strategy. The segment’s outsized gains have been partly generated by the ongoing rebound/ opportunities in energy sector credits.
  • After just over a year of relatively volatile returns, large managed futures funds followed up their eventful and exceptional post-BREXIT performance in June with mixed, but positive returns. The average gain of +0.92% for $1bb+ managers was their lowest absolute gain/loss in the last 14 months, but also incorporates a greater dispersion of returns in July than in prior months.
  • Investors in managed futures strategies have historically been more sensitive to variations in returns than other strategies. Given the segment entered June on the tail-end of a string of declines, July’s muted gains are likely a welcome sight for all participants.

Activists And Distressed Hedge Funds

  • In the post-BREXIT month of July, discretionary macro hedge funds again showed greater dispersion of returns than most other strategies, reflecting the variety of views among managers. The overall macro universe returned 0.86% during the month, with larger macro funds performing slightly better in July, though slightly worse for the year.
  • Commodity hedge funds, which continued to receive investor interest through June, experienced their third monthly decline of 2016. Fortunately, each down month has been of a smaller directional magnitude than each positive month of 2016. The universe was overtaken by distressed as the best performer of any primary market or strategy this year.

EM Gains Continued in July as China Joined the Rally

After their BREXIT-induced largest monthly decline in over three and a half years, Europe-focused hedge funds rebounded in July, but it was emerging markets strategies which again outperformed during the month. The trend of BRL/USD strength continued into July, and persists in August as the Olympics have begun, carrying Brazil-focused funds to industry leading returns. The only regional segment which declined in July was the commodity-influenced Africa/Middle East investment region.

Regional Performance Overview

Activists And Distressed Hedge Funds

  • Should the trend of BRL/USD strength continue, Brazil-focused managers are on pace for their best year on record since 2009, and third best since 1999. Gains thus far from 2016 have a long way to go to recapture losses from the prior three years, but for investors with the foresight to recognize a shift of the multi-year currency trend, 2016 has been an excellent year for investors in Brazil.
  • China funds, which are still experiencing redemption pressures, albeit to a lesser degree each of the last three months, experienced a much needed rebound in July, returning +3.10%. The universe remains negative for the year.

Activists And Distressed Hedge Funds

  • Funds investing in Russia continue to perform well, despite the sell-off in energy commodity prices in July. The universe has outperformed all emerging markets over 2015/2016. Russia-focused funds have shown a history of either leading, or trailing all other segments of the industry. Only one time on record have annual returns averaged lower than +/-10%. This occurred in 2000, after the universe produced returns of +126.05%, -72.32% and +126.05% in 1997, 1998, and 1999, respectively.
  • Firms domiciled in Europe also produced decent average returns in July. The Europe-based hedge fund industry had suffered elevated outflows from both managed futures and equity-focused strategies at the end of Q2.

Sub-sector Overview

Activists And Distressed Hedge Funds

  • Hedge funds focused on energy companies’ capital structure, primarily equities, were able to perform well in the declining energy commodity price environment in July. The universe outperformed the S&P Energy Sector during the month, which was -1.93%.
  • With the exception of the seven month span from August 2015 to February 2016, when securitized credit funds declined -2.46%, the universe has been one of the most consistently positive over the last several years. Since February, the universe has produced an average return near 5%, after another positive month in July, +0.99%.