With five months of 2017 in the books, the $3 trillion hedge fund industry continues to look mostly positive on the surface. The majority of products are producing positive returns, and the average positive return has outweighed the average loss, but returns based on recent allocation trends have likely left some investors disappointed.

The theme of less than fortunate results for 2016/17 fund flows continued into May. Event driven funds, a segment which has lost significant investor capital in the last two years, are among 2017 industry performance leaders. Macro strategies, particularly the industry’s largest which have also recently been investor favorites, are among the laggards.

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Highlights

  • Hedge funds returned an average of +0.21% in May, and +3.20% YTD in 2017.
  • Smaller long/short equity and large event driven funds are leading the industry through May.
  • Emerging markets’ run continues as China remains strong, and India funds falter slightly.
  • The largest macro fund returns are behind only large FX and commodity funds for lagging 2017 returns.

Industry Returns Positive for 7th Month in a Row, Last Twelve Month Returns Outperform Global Balanced Index

Hedge funds returned an average of +0.21% in May, and aggregate returns are +3.20% YTD in 2017. May performance was led by funds focused on corporate capital structures, while commodity and currency funds continue to be the primary drag on industry performance.

Hedge Fund Industry Returns

Key Points

  • Returns across the industry continue to be broadly positive.
    Nearly three quarters of reporting funds are positive in 2017, and average gains from those in the black are outpacing those in the red, +6.44% vs. -5.28%.
  • The largest macro strategies are under-performing.
    Macro funds, particularly the largest strategies, had been a bastion of positive investor sentiment for the industry in 2017. Returns for the year, though, are now worse than large managed futures funds, and underperforming almost all segments of the industry this year.
  • Equity strategies are leading the industry in 2017, but generally underperforming regional indices.
    While it is not a mandate to outperform benchmarks, it is worth noting relative returns for the sake of comparison, and the current market opportunity costs. Of long/short equity funds focused on US markets, fewer than 10% of reporting products are outperforming the S&P 500 (9.2%), while virtually no Europe-focused long/short equity managers are outperforming the regional indices (0.57%).
  • Commodity strategies post fourth consecutive loss in May.
    As one of the only segments of the industry to see aggregate net inflows in 2016, recent commodity fund performance has likely been disappointing. After four consecutive negative months, during which the largest products have underperformed, the universe is the most negative of any asset class or primary strategy in 2017.
  • The largest event driven funds are doing something none of the other largest funds are doing.
    In every other category of the largest funds tracked by eVestment, the ten largest funds are underperforming their peers. The ten largest event driven funds are the lone exception, and are outperforming all other major segments of the industry in 2017.

Led by China in May, EM Outperformance Continues into Fifth Month of 2017

Emerging market strategies produced returns double that of developed market strategies in May for the fifth month in a row. All regional EM exposures are positive in 2017, though May was difficult for Brazil-focused funds.

Hedge Fund Industry Returns

Key Points

  • China-focused funds are up nearly 12% in 2017.
    Almost 15% of reporting funds focused on China are outperforming the MSCI China benchmark, which is far better than the metric for developed market managers. It is worth noting, however, that in a universe that contains mostly long-biased equity funds, nearly 12% of the reporting universe is negative for 2017.
  • India-fund returns faltered in May, but remain industry leaders.
    After four consecutive months of average returns greater than 4%, India-focused funds were negative in May. This comes despite the country’s equity benchmark being positive during the month.

Article by eVestment