Hedge funds outperformed underlying markets in September with the Eurekahedge Hedge Fund Index returning a flat 0% while the MSCI World Index finished the month down 1.86%. On a year-to-date basis, hedge funds are up 3.87%, falling just slightly behind underlying markets as the MSCI World Index returned 3.99% over the same period.
Key takeaways for the month of September 2014:
· Redemption pressure builds up in hedge funds following three consecutive months of net asset outflows as investors withdrew US$13.3 billion from global hedge funds in Q3 2014.
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· CTA/managed futures funds reported the biggest gain of 2.47% in September, bringing their year-to-date returns up to 6.54%, the highest out of all strategic mandates.
· Japanese hedge funds were the only developed country mandate to post a gain during the month, reporting their fifth consecutive month of gains, beating the benchmark Nikkei 225 index by almost 3.5% year-to-date.
· Latin American managers suffered losses of 2.03% during the month, though outperforming the MSCI Latin America Index which fell 7.74%.
· India focused hedge funds posted their eighth consecutive month of gains, up 2.62% in September and 30.88% year-to-date.
· Eastern Europe and Russia investing funds were down 4.08% in September, and down 11.57% year-to-date – the worst performer among all regional mandates.
· Distressed debt strategies posted a loss of 2.24% in September, their biggest monthly loss in the past three years.
Investors are gearing up in earnest at the prospect of tighter monetary policy in the US as economic recovery continues to gain strength, along with remaining concerns regarding the pace of a rate rise given the mammoth challenge of unwinding the Fed’s balance sheet. In the meantime, the ECB surprised market participants by embarking on further easing, cutting interest rates another 0.10% and announcing targeted long term refinancing operations (TLTRO), driving the euro down to a two-year low against the greenback. Meanwhile in Asia, mainland Chinese stocks were among the best performers in Asia amid speculation that an economic slowdown would be stemmed by government reform measures and an exchange linkup with Hong Kong that could fuel further capital inflows.
Japan focused hedge funds were the only regional mandate to report positive returns in September, gaining 0.76% as underlying markets in the region rallied on speculation that reviews to Japan’s government pension investment fund (GPIF) would increase its allocation to the country’s equities. The benchmark Nikkei 225 index rose 4.86% during the month. Eastern Europe and Russia was the hardest hit region as sporadic fighting continued to break out despite an official ceasefire and the west imposed a fresh batch of sanctions against Russia. This had a negative impact on the rouble and also equities in the region, with the Eurekahedge Eastern Europe & Russia Hedge Fund Index falling 4.08%. Managers investing with a Latin American and emerging market mandate also saw significant losses of 2.03% and 1.52% respectively. Managers reported losses on their Brazilian exposure as the Brazil IBOVESPA dropped 11.70% in September amid investor concerns after Moody’s cut the country’s credit rating to negative. Hedge funds focused on North America were marginally down 0.18%, though still managing to outperform the benchmark S&P 500 Index, which declined by 1.55% during the month.
September saw a sharp rise in investor risk aversion, resulting in a corresponding flight to safe assets. The CBOE VIX Index; a measure of investor fear, rose 34.90% to 16.31 during the month. Divergence in economic policies between the major central banks drove much of the currency trends for September, with the US dollar being the biggest winner. The strong dollar also put heavy pressure on commodity prices and driving down energy prices. CTA/managed futures managers posted the largest gain out of all strategic mandates at 2.47% from their exposure to short energy and long US dollar positions. Arbitrage and macro strategies also posted positive returns with gains of 0.36% and 0.24% respectively. On the other hand, fixed income as an asset class was hit hard by expectations of interest rate hikes. Bonds across all categories saw a fall in prices, with junk bonds seeing the biggest sell-off. Distressed debt strategies lost 2.24% while the Eurekahedge Fixed Income Hedge Fund Index fell 0.60%, their biggest monthly loss in 2014 so far. Long/short equities also reported losses of 0.96%, coming under pressure due to global equities as a whole retreating in September. The protests in Hong Kong towards the end of the month weighed in on investor sentiment, adding further selling pressure to equity markets which were already jittery at the prospect of rising rates.