Securitized Credit A Lone Bright Spot For Hedge Funds Amid August’s Sell-off

Securitized Credit A Lone Bright Spot For Hedge Funds Amid August’s Sell-off by eVestment

All major hedge fund strategies fell in August, China funds dip into negative territory for 2015.

The hedge fund industry produced an aggregate return of -2.19% in August, dropping YTD returns into negative territory, -0.95%. All major market exposure produced negative returns during the month, however most outperformed asset class benchmarks.

Origination & financing strategies, hedge funds that act as lenders (varieties of ABL) or loan originators, produced an aggregate decline in August, but outperformed all other major strategies not only during the month, but year-to-date as well. Gains and losses for the group were distributed evenly across the universe, however those posting losses in August had experienced at least one other down month within the last three, while those with gains in August did not. This is simply an indication of the variety of sensitivities to broad financial market events across what generally appears to be a non-volatile, low-correlation strategy.

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Managed futures hedge funds have yet another negative month

Managed futures funds experienced another negative month in August, their fourth in the last five months. Losses were more concentrated within smaller managers, as has been the case during most of this recent difficult stretch. Small managed futures products declined -1.80% in August and are -2.10% YTD, while large MF products were -0.37% in August, but +3.03% YTD.

The two largest reporting managed futures strategies in August were both positive during the volatile month, despite having very similar return characteristics as the rest of the universe in the months prior. The five largest reporting MF funds produced average gains of +4.65% YTD and one YTD decline due to a large loss in August.

The drawdown for activist strategies accelerated into August, its third month. This should not come as a surprise given their tendency for concentrated, primarily equity market exposures, combined with August’s sell-off. Average declines of -5.47% during August were the strategy’s largest since August and September 2011 when they lost -5.70% and -6.19%, respectively. It is worth noting that in the two-year span following those losses, activists returned an average of 35%.

Credit strategies posted their third consecutive aggregate decline in August and largest in at least two years. All told, in the last twelve months credit funds have declined -3.42% and experienced nine monthly declines. While still experiencing the same return characteristics (losses in nine of twelve months), large credit funds have declined by almost a third less than their smaller peers (-4.21%).

Hedge Funds

Securitized credit markets focused hedge funds rise +0.05% in August

Funds focused on multi-sector securitized credit markets were the lone bright spot in the industry in August, rising +0.05%. The universe outperformed other segments of the structured credit world, including MBS strategies (-0.27%) and ABS-focused funds (-0.59%).

Emerging market strategies posted large declines for the second consecutive month in August,-4.39%. Losses were greatest from China and Brazil, but every EM exposure produced negative aggregate results in August.

Hedge funds focused on Chinese markets continued their slide alongside the country’s equity benchmarks.The average China fund declined -8.36% in August which brings YTD returns into negative territory, -0.48%. Despite going negative for the year, China-focused funds continue to outperform China equity indices as the MSCI China index fell -11.68% in August to -9.48%.

For the year, funds focused on Brazil have been hurt most by local market sell-offs. The group fell -8.51% in August and is now -25.34% YTD in 2015. The best performing EM exposure in 2015 has been Russia, +12.90%, despite declining -4.28% in August. Russia funds were -40.77% in 2014.

Managers domiciled in Hong Kong are producing returns well above average in 2015, +3.75%. Hong Kong based strategies are a mix of mostly China-focused funds, with other major global strategies.

Hedge Funds