October Hedge Fund Returns Boosted By Small Caps: JPM Prime Brokerage


October witnessed broad-based gains in hedge funds with 1.48% in the aggregate and 7.19% for year-to-date.

Alessandra Tocco and team at JPMorgan Chase & Co. (NYSE:JPM) in their recent report on ‘Prime Brokerage Global Hedge Fund Trends’ point out the solid performance posted by the hedge funds are the best witnessed since 2009.

Major hedge fund strategies post good performance

JPMorgan Chase & Co. (NYSE:JPM)’s report points out all of the major hedge fund strategies posted positive returns in October, with equity long short delivering 1.80%, while event driven strategies leading with 1.5% returns. In the aggregate, global macro posted positive gain of 1.09%, which is the first positive monthly performance for the strategy since April.

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JP Morgan analysts observe October’s gains among equity long short managers were driven to a strong degree by quantitative directional funds, which posted 2.70% in the aggregate. Turning their attention to sector performance, the analysts note managers benefited from exposure to U.S. small cap stocks, large cap U.S. Consumer Staples names and large cap names in the U.S. Materials sector.

The following graph highlights sector performance for October 2013:

JP Morgan analysts point out October’s gains by event driven managers signify the fifteenth consecutive month of positive aggregate gains for the strategy. Such a positive performance was aided largely by activist and special situations funds.

Securities lending trends

Alessandra Tocco and team at JPMorgan Chase & Co. (NYSE:JPM) note during October, the U.S. Prime Brokerage Portfolio experienced the largest shorting in single names of any single month in 2013.

The analysts point out shorting was significant across all fixed income products, including U.S. treasuries in the two and five year parts of the curve. The U.S. Prime Brokerage fixed income book was net shorted for a second consecutive month.

In regards to international securities lending is concerned, JP Morgan analysts point out in Europe, long/short hedge funds expressed a net long bias in Financial and Consumer, while Industrials were net shorted. The analysts observe among the top 20 names in Europe, Peugeot, Telecom Italia, Koninklijke Vopak NV and Kone OYJ-B posted the largest percentage increases shorting month-over-month.

JP Morgan analysts note the U.S. Prime Brokerage ETF book was net covered in October. With the continuous rally witnessed by the market, IWM (iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), MDY (SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) and SPY (SPDR S&P 500 ETF Trust (NYSEARCA:SPY) experienced significant covering.

The following table depicts U.S. securities lending trends by ETFs:

Securities lending trends by ETFs

On the institutional investor sentiment in North America, JPMorgan Chase & Co. (NYSE:JPM) analysts believe Boston-based allocators are interested in learning about new launches and emerging managers, though primarily for informational purposes. Besides, most investors in the region prefer to commit capital only with those having at least a one year track record.