Hedge fund performance – As Brexit volatility and the “V” shaped market turnaround is in the rear view mirror, and the stock market appeared to sleep walk through a low volatility stupor in August and even September, and hedge fund performance isn’t that much different.
Yes, there was the predicted stock market volatility spike just after labor day, but since then the market leading into the election has been a snooze fest. In fact, certain analysts think election risk is out of the market. It is against this dead calm background that the HSBC Hedge Weekly hedge fund performance list seems mostly staid and sedentary.
Hedge fund performance – Stock market calm is breeding an eyes glazed over type market environment
This August the S&P 500 slept walked through 17 trading days in a row moving less than 0.75% from peak to trough. Regardless of how one measures volatility – perhaps affording upside deviation less risk factor than downside deviation – regardless of the measurement, the stock market fell into a deep sleep this summer.
Certain aspects of the hedge fund performance list of late resembles this mindless spiral. It reminds one of a grade school formal dance where everyone sits in the same predictable location with the same people and nothing changes. In fact, nearly 80% of the top 10 this week have been generally near the same relative position most of the summer.
It is as if time stands still and the dopamine that inhabits the market environment has lulled the leaders to sleep.
Hedge fund performance – While CTAs might have been anticipating election volatility, that hasn’t materialized
There are a few predictable exceptions. After strong Brexit performance, the dopamine market environment has been less than productive for managed futures CTA momentum players. What anecdotally has been described as a mind-numbing market environment that presented challenges in August can be confirmed by examining performance.
HSBC’s Managed Futures / Systematic Global strategy, for instance, is up just 0.17% on the year – after leading hedge funds following the January-February and Brexit “V” bounce recoveries. The problem is CTA red ink from August is bleeding into September.
Looking at month to date performance, only 1 in 10 CTAs in this category is positive on the month. And once you understand the CTA strategy variations the reason for this becomes clear. Some of those rare month-to-date winners are short time horizon, such as Tony Crabel’s $498 million Crabel Fund SPC Ltd Class A, which was up 1.76% month to date and is higher by 11.08% on the year. With 15.36% annualized volatility and average annual returns of 10.50%, the diversified strategy is considered in some quarters a nice portfolio complement to longer-term momentum strategies on a beta market environment basis. THe worst drawdown of 16.71% from 1998 to 1999 is emblematic – the fund did not experience a worst drawdown during the 2000’s, an interesting trait in a noncorrelated manager.
Market environment notables in the category include the $953 million Two Sigma Compass Cayman Fund, down -0.94% month to date but nonetheless up 12.58% on the year. The relatively well-diversified strategy on a beta market environment basis has 8.73% annualized volatility with returns of 16.30% annualized returns. That’s not a mistake, as on a relative basis it correlates with a beta market environment strategy diversified approach.
Hedge fund performance – Equity long / short strategies find varied results
Another strategy having difficulty in the dopamine market environment era is the Equity Long / Short USA strategy, up just 0.32% year to date.
While the S&P 500 is not exactly the best benchmark, the strategy is typically net long 75% or so and the relative performance is a meaningful measure. With the S&P 500 up 6.52% year to date, one might reasonably expect equally correlated long / short strategies to be up near 4%. But the odd market environment has not led to strong stock picking opportunities, it has been previously argued.
Looking at the sector returns, the diversity and differential between the top and bottom funds is striking, particularly when compared against the relatively predictable managed futures CTA market environment performance.
One of the category leaders is the $2.7 billion mathematically-driven Renaissance Institutional Equities up 12.84%. The fund has both volatility and annualized returns near 10%. Its worst drawdown of 35.73% shouldn’t come as a surprise relative to the time period: 2007 to 2009, revealing its correlation amid the 2008 financial crisis.
US focused long / short strategies are at least positive. With European stock markets generally higher year to date – the FTSE 100 (PR) is up 10.72% year to date — the HSBC Equity Diversified / Europe category is nonetheless down 4.97%. This could be due, in part, to the market capitalization diversity found on the HSBC roster of performers.
In this category, there are significant year-to-date losers but no winners who are up more than 5%. The FTSE 250 (PR), which is up 3.20%, is the relative outperformer in Europe year to date, with the German DAX up just 1.71%.
In this category perhaps the most statistically noteworthy is David Grimbley’s $768 million TT Mid-Cap Europe Long / Short Fund LTD, Class B, which is up 2.49% on the year. The fund’s annualized volatility, at 8.23%, is lower than its average annual return 11.2%. Considering it from a noncorrelated perspective, the fund’s worst drawdown did not occur during the 2008 financial crisis, but rather was a slight 7.61% and occurred from April to September 2006.