With half of 2017 completed, the $3 trillion hedge fund industry is generally positive for the year, but has likely left many investors who have allocated in 2016/17 feeling uneasy. While the majority of products are producing positive returns, and the average positive return continues to outweigh the average loss, at the strategy level the picture is far less positive for some.

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Highlights

  • Hedge funds returned an average of +0.13% in June, +0.84% in Q2, and +3.26% YTD in 2017.
  • Smaller long/short equity and large event driven funds are leading the industry through June.
  • Emerging markets’ run continues as China funds posted another very positive month in June.
  • Investors in the largest macro and managed futures funds are having a difficult 2017.

Industry Returns Positive for 8th Month in a Row Despite Above Average Deviations Across Strategies in June

Hedge funds returned an average of +0.31% in June 2017. Aggregate returns were +0.84% in Q2, and +3.26% YTD in 2017. Performance continues to be dominated by equity-focused strategies, while macro, and particularly managed futures strategies had a difficult end to the second quarter.

Hedge Funds

Key Points

  • Investor allocations at the strategy level have been met with volatile returns.
    In 2017, through May, investors have allocated most to macro ($13.8 billion), managed futures ($4.2 billion), and credit ($3.6 billion). Credit fund performance has been reasonable (87% positive YTD, with average gain of +4.2%), however macro and managed futures have likely shaken investor confidence. Both have fewer than 50% of funds positive YTD, and the largest managers are underperforming.
  • Activists remain among industry leading strategies.
    Strong equity markets have aided activist funds in 2017. The universe of typically concentrated equity-focused managers is lagging only long/short equity among major strategy returns in 2017. Despite YTD returns among the group being below major equity and balanced benchmarks, at the fund level many activists are outperforming, or at least keeping pace with regional equities. Like any group which maintain concentrated and likely unique positions, there are a handful of funds which are negative YTD, keeping the universe’s aggregate returns lower than might otherwise be expected.
  • Commodity strategies, asset gainers in 2016 and 2017, continue to decline.
    As one of the only segments of the industry to see aggregate net inflows in 2016, recent commodity fund performance continues to be disappointing. After what is now five 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 continue to outperform.
    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 June, EM Outperformance Continues into Sixth Month of 2017

Emerging market strategies once again produced returns double that of developed market strategies in June for the sixth month in a row. China and India continue to lead, however Russia-focused funds’ June performance has pushed them negative in 2017.

Hedge Funds

  • China-focused funds are up over 17% in 2017, India-focused up over 19%.
    Both universes of hedge funds have benefited from strongly positive equity markets in 2017. Each group is now lagging regional benchmarks, but both have shown benefit to investors when regional returns are not quite as positive as they are now.
  • Brazil returns faded in Q2, but remain positive YTD.
    Brazil-focused funds have seen a volatile stretch after leading the industry in 2016. The universe’s Q2 returns were the lowest across the entire hedge fund industry.

Article by eVestment

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