Most hedge funds posted gains in September reversing some of the year-to-date losses and bringing hedge fund performance more into line to that of equities for the year; that’s according to JP Morgan’s October 18 Prime Brokerage Global Hedge Fund Trend report.
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Specifically, the September month-over-month performance for the HFRI Fund Weighted Composite Index was +0.62% — the seventh consecutive month of positive performance. Year-to-date the index is now up by 4.19% compared to 7.84% for the S&P 500 index. For the month of September equity Hedge funds gained 1.05%, Relative Value strategies added 0.93%, and Event Driven posted a positive return of 0.66%. Macro (-0.26%) was the only detractor among the broad hedge fund strategies.
Year-to-date Event Driven and Relative Value strategies are the best performing of the group chalking up returns of 6.71% and 5.85% respectively. Distressed/Restructuring was the leading sub-strategy for the month and leads all Event Driven sub-strategies with gains of 9.5% year-to-date. Activists as a group lost 0.5% for September. Even though Macro funds posted a negative return for September, year-to-date the fund class is up by 1.81%.
Hedge funds increase leverage and short positions
The securities lending and leverage risk exposure data in JP Morgan’s prime brokerage report reiterates the fact that hedge funds are increasing leverage and short positions as market uncertainty grows. Indeed, JP Morgan’s data shows that gross leverage in its prime brokerage cash portfolio rose by 1.65% in September to its highest level post the market correction earlier in the year. Gross leverage in the bank’s prime brokerage cash portfolio ended September at 1.85, up from 1.82 in August. Levered accounts, in contrast, saw gross leverage fall by -1.21% to 2.44, marginally below the year-to-date high of 2.47.
The biggest increases in leverage were seen in the High Grade Fixed Income and Multi-Strategy fund spaces. Both saw double-digit growth in gross leverage month-on-month 12.32% and 10.31% respectively bringing leverage close to year-to-date highs. The long-short ratio3 of the Prime Brokerage equity cash portfolio rose in September by 2.68% to 0.88, its highest level in 23 months, as long positions grew by 5.11% while shorts saw a 3.83% change month-on-month. September also marked annual highs for both gross and short volumes with gross volume up 7% vs. August and 14% vs. the 2016 year-to-date average.
In the equity space, last month hedge funds dumped defensive stocks and continued to by cyclicals according to JP Morgan’s figures. Utilities, Basic Materials, and Energy saw a trend reversal, undergoing sharp contractions in short exposure while seeing long exposure expand. Long exposure in Consumer Cyclicals and Technology continued to fall in September and was accompanied by a rise in short exposure. That being said, Consumer Non-cyclicals also saw a sharp improvement in long exposure last month and this sector now represents the largest sector in the long portfolio at 20.3%.