Hedge Funds’ Gains Were Available In A Year Of Aggregate Declines by eVestment

December’s losses confirm 2015 as a down year for the industry, however there were bright spots.

The hedge fund industry produced an aggregate return of -0.77% in December. The decline was the industry’s fifth negative month in the second half of 2015 and eighth of the year. Aggregate industry returns were negative in 2015 for only the third time on record at -2.01%.

Despite overall industry returns being negative in 2015, the distribution of returns across funds was nearly even in terms of the availability of positive vs. negative annual performance (49% positive, 51% negative). The average positive return was 8.12% and the average negative return was -9.87%. The implication being that within many universes, good relative performance was available, providing investors could determine what processes could work in difficult times.

Hedge Funds Aggregate Declines

Managed futures down -2.66% in 2015

Managed futures funds ended 2015 with negative aggregate returns, -2.66%. This was the universe’s fourth annual aggregate decline in five years. December was the sixth consecutive month where MFs strategies, particularly larger funds, produced returns directionally different than the prior month, with elevated volatility. Outside of emerging market exposure, only activist hedge funds produced more volatile returns in H2 than large MF strategies. The group produced excellent returns during the strongest portion of the USD rise which peaked in March 2015. Losses have averaged near 4% during this volatile stretch since.

In term of availability of positive returns, the MFs space was mixed between large and small funds. Large funds, those with AUM >$1B, were positive in 2015, +2.55%. Selecting a large MFs fund at random would have given investors a nearly 70% chance of positive returns in 2015. The average positive return from large MFs funds was +6.04% in 2015. Conversely, selecting a small MFs fund had greater upside potential, but greater risk of loss. Only 40% of small MFs products were positive in 2015, but average positive returns were +9.86%.

Credit hedge funds posted their 8th aggregate decline of 2015, in December. The average return was -0.94% during the month with the largest declines coming from exposure to energy and distressed assets.

Hedge Funds Aggregate Declines

Distressed hedge funds fall -8.75% in 2015

Distressed funds had a very difficult Q4, falling -4.58% and ended 2015 -8.75%, the sector’s second worst year on record behind 2008. Only ¼ of the distressed universe was able to produce positive returns in 2015. Average losses outpaced average gains -10.69% vs. +7.70%.

Market neutral equity funds (MNEq) were a bright spot for the industry in 2015. Average returns were only +2.60%, but 62% of funds were positive and performance was skewed more positive than most. The average MNEq fund gain in 2015 was +8.17% vs. an average decline of -5.51%.

Hedge Funds Aggregate Declines

2015 ended with emerging market hedge funds producing a positive Q4, despite a half-percent decline in December The +1.80% rise in Q4 follows a -10.50% decline in Q3, the universe’s largest quarterly loss since 2011. December’s decline came as a result of more losses from Brazil-focused funds and a commodity-driven equity market sell-off in Russia.

Despite the December decline, Russia and then China ended 2015 as two of the most profitable segments of the hedge fund industry in 2015. For Russia-focused funds, the average gain of +9.06% did not come close to erasing 2014’s massive -40.77% decline. For China-focused funds, the year’s gains followed similar gains in 2014, but have also preceded what has likely been a very difficult start to 2016.

Regional, or country-specific exposure in general was a source of excess returns for hedge funds in 2015. Funds who were able to avoid the pitfalls within Brazil and Africa/Middle East could have had an excellent year. However, only 42% of EM products were positive in 2015 and average losses outpaced gains -15.17% to 10.87%.