Long / Short Hedge Funds had a particularly strong month in April, a Morgan Stanley Prime Brokerage report noted. While analysts have fretted over China and efforts to reduce government and corporate leverage, long exposure significantly benefited fund managers. Other major stock market trends can be seen in hedge fund positioning, including the retail apocalypse trade playing itself out.

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European and Long / Short Hedge Funds European hedge funds best performers

On a global basis, European hedge funds generally had the best returns in April, with the average hedge fund in the Prime Brokerage survey delivering 1.62% performance, with the region’s Long / Short funds bringing up the average with 1.97% performance.

Long / Short strategies typically lag long only benchmarks during times of strong beta market performance due to the short exposure, but in this wasn’t the case in April. The report noted long exposure was up 2.6% and the shorts were up 1.3% amid positive stock market index performance in developed markets.

The 2.09% monthly returns from the Europe Stoxx 600 was closer to the 1.97% EU Long / Short strategy than is typically the case. In the US, for instance, equity Long / Short hedge funds are up 4.54% on the year while the S&P 500 is up 7.15%, both basis the end of April. The report noted that on a weighted average basis, global equity Long / Short funds were capturing nearly 2/3 of the gain in the MSCI AC World index.

In the US, Event Driven strategies outperformed the S&P 500 on the month, providing investors 1.93% returns on average at a time the large industrial benchmark was up 1.03%. US Equity Long / Short and all other funds underperformed the benchmark but were nonetheless positive, delivering 0.81% and 0.66% returns respectively.

Asian hedge funds turned in muted performance in April, with the equity Long / Short strategy up only 0.69% with all funds up just 0.47% compared to the MSCI Asia Pacific index, which was up 1.37% for the month. On the year, Asian Long / Short strategies are up 5.81% while all funds are up 4.49%, compared to the MSCI Asia Pacific Index, up near double at 11.01%. Within this region of generally below average hedge fund performance, at near 50% of the equity benchmark, those funds with Chinese longs are standout, having enjoyed 31% year to date performance in this category besieged by negative analyst comments.

Long / Short Hedge Funds
Long / Short Hedge Funds and others sell retail amid fears of Amazon taking over the industry

Hedge funds shed retail holdings while exiting Chinese longs after strong performance

Relative to stock sector positioning, hedge funds in the Prime Brokerage survey continued their trend of shedding retail-orientated holdings. Consumer Discretionary holdings ex Autos, Media and Internet, after peaking on a five-year rolling basis in the winter of 2015, has been on a steady decline. Hedge fund holdings in this category are approaching 2011 lows as the Amazon effect is being felt by hedge fund investors.

Hedge funds in North America were net sellers in April, with their retail holdings leading the way. What they did like was the Pharma sector, which was up off multi-year holding lows. In Europe, funds were net buyers with Materials leading the parade. European Banks were sold heading into the French election and only “partially bought back” despite a positive market outcome.  In Asia, while Chinese stocks were big winners on the year, many hedge funds sold into strength, as Chinese shares and emerging Asian shares were sold by fund managers.

“Across regions, long alpha has been quite strong, while short alpha has been mixed,” the Prime Brokerage report noted. Asian hedge fund long exposure has “consistently outperformed” year to date, with a long China short Japan exposure weighting helping. “However, shorts have been tougher in Asia, which is also somewhat coming from an overweight exposure to China. Still, the total spread between Asia longs and shorts is the highest among all regions.”