Managed futures and quantitative equity funds excelled while activists’ pain continued.
The hedge fund industry produced an aggregate return of -1.20% in September, dropping YTD returns further into negative territory for 2015, -2.35%. The industry’s last annual decline was 2011 when average returns were -4.99% and the S&P rose +2.11%.
For many in the hedge fund industry, 2015 is shaping up as the worst year since 2011, if not since 2008. One primary difference between 2015 and 2011 is many major markets produced positive returns in 2011, more so on the credit side, and the hedge fund industry was generally perceived to have lagged significantly. In 2015 the industry is mostly outperforming equity, multi-asset, commodity and regional/country specific indices.
Systematic strategies performed well during September's global volatility
Systematic, or quantitative strategies performed well during September’s global volatility. Most interesting was the performance of those focused on equity markets, given declines seen following the US Fed meeting mid-month. Quantitative equity strategies returned an average of 0.58% in September and were down only slightly in Q3, -0.39%, while the S&P 500 and MSCI were -6.44% and -8.45% in Q3, respectively.
After four down months in the last five, managed futures funds, heavily populated with systematic strategies, gained +1.01% in September, ending Q3 only -0.26%. The difference between large and smaller managed futures funds has been significant in 2015. Those with greater than $1 billion in AUM entering 2015 returned an average of +2.53% in September, +3.62% in Q3 and +4.40% YTD, while their smaller peers returned +0.80%. -0.54% and -1.59% in the same periods.
Through the end of Q3, event driven returns are on pace for their worst year since 2008, having eclipsed 2011 losses of -3.90%. Event driven funds fell an additional -2.53% in September, bringing YTD returns to -4.15%. The group declined -20.48% in 2008, but bounced back with +30.35% in 2009 and +11.78% in 2010.
Activist fund returns decline
Activist fund returns have been increasingly negative in each of the last four months, having declined an average of -10.92% during this stretch. Losses in September of -5.06% are the largest since September 2011. Activist funds went on to return -4.26% in 2011, followed by 14% in 2012 and 20% in 2013.
Credit strategies posted their fourth consecutive aggregate decline in September, with losses accelerating in each of the last two months. In the last twelve months, credit funds have declined -3.82% and experienced nine monthly declines. Larger funds continue to mitigate losses more effectively than their smaller peers, returning -2.60% in Q3 and -1.00% YTD compared to -3.34% and -2.64%, respectively. However, the securitized sector continues to be a standout in 2015.
Emerging market strategies’ brutal Q3 ended with the group falling -1.57% in September and -9.51% for the quarter. Losses were greatest from exposure to Brazil as the universe of funds targeting the country declined 22.21% in the third quarter. Brazil funds sit -31.58% through Q3 2015 which, barring a significant rebound, would be the universe’s worst year on record since the launch of eVestment’s coverage of a Brazil universe in 1998. Their prior worst year was 2008, declining and average of -22.49%.
Hedge funds focused on Chinese markets posted slight gains in September and again outperformed the country’s equity indices significantly. In Q3, China-focused funds declined an average of -16.03% while the S&P China index declined -24.35%. For the year, funds investing in China are slightly positive,+1.02%, while the S&P index has fallen -12.65%.
Managers domiciled in Hong Kong continue to produce returns well above average in 2015, +6.68%. Hong Kong based strategies are a mix of mostly China-focused funds, with other major global strategies.