The hedge fund industry produced its eleventh consecutive month of aggregate gains in September as dominant performance trends in place for most of the year carried on. Activists continue to lead the industry, followed by long/short equity and their quantitative subuniverse. Managed futures resumed their downward trajectory, followed by macro, though the latter had many positive signs.

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While the vast majority of the industry is producing gains, and those gains are on par with major global balanced indices, after fees, the allocation themes of the year may be leaving those having placed new money with mixed feelings. The re-emergence of long/short equity has likely been pleasing investors, but wide performance dispersions within the largest macro funds is less than ideal.

Highlights

  • Hedge funds returned an average of +0.67% in September, +2.32% in Q3, and are +5.92% YTD in 2017.
  • More than three-quarters of the industry is positive in 2017, and average gains are over 10%.
  • Emerging markets’ run of elevated outperformance stalled in September as India and MENA strategies lagged.
  • Fewer than 20% of the largest managed futures strategies are above 5% in 2017.

Industry Positive for 11th Consecutive Month, Dispersion Widens as Managed Futures Drop

Hedge funds returned an average of +0.67% in September 2017. Q3 2017 average returns were +2.32%, and year-to-date the industry is +5.92%. Activists are leading, and managed futures are the only primary strategy down for the year.

Hedge Funds 1-1

Key Points

  • Aggregate returns surpass full-year 2016, still under-represent opportunity available in hedge fund space in 2017.
    With now over 75% of products producing positive returns in 2017, and the average return from those products over 10%, aggregate returns near 6.0% are a poor universal representation of investor experience in 2017.
  • Activists leading the (non-EM focused) industry in 2017, nearing 10%.
    After returns dipped in August, activist returns jumped in September to their highest level of the year, and highest since November 2016.
  • What had been a nice two-month turnaround for managed futures came to a halt in September.
    Losses from managed futures funds in September were the primary reason the dispersion, or difference between average gainers and average losers, was high in September. Nearly two-thirds of managed futures strategies declined in September, and over 50% are negative for the year. Interestingly, the strategy’s average loss in 2017 is nearly a mirror of the average gain within the strategy (+7.95% vs. -8.41%). It is apparent that using quantitative methods for finding trends and momentum in global rates, FX, commodities and other derivatives markets has been very difficult this year, but not universally impossible.
  • Macro fairing better than managed futures, but still generally a drag on industry returns.
    Macro and managed futures are underperforming this year in aggregate, however there has been an important difference. Macro strategies over $1 billion in AUM are +4.13%, while the equivalent managed futures universe is -1.52%. Within this large macro universe, nearly 50% have >5% returns in 2017, however less than 20% of large managed futures funds have accomplished the same.

While Still Led by Brazil, EM Underperforms DM After Eight Consecutive Months of 2x Outperformance

Emerging market strategies continue to produce positive returns, in aggregate, but losses from India-focused funds, as well as MENA strategies, were a drag on overall segment returns.

Hedge Funds

Primary Regional Exposure

  • Exposure to Brazil continues to produce strong results.
    No other segment has outperformed exposure to Brazil in the last four months. After leading the industry in 2016, Brazil-focused funds are now within striking distance of China and India funds for industry leading performance for the year.

Firm Domicile

  • Asian hedge funds lead all regional domiciles in Q3 2017, and YTD.
    Firms domiciled in Asia have been generating superior aggregate returns in 2017, outperforming products offered by managers located in the UK, US, and continental Europe. The higher proportion of EM strategies in Asia and Latin America continues to be the primary source of this outperformance.

Article by eVestment