Hedge funds posted an average return of 1.9% last month, but they were still down for the year with the average return at -9% year to date. It looks like things could change this month though as early numbers suggest that April will bring them back on the plus side for the year.
Morgan Stanley analysts add that the first quarter was the worst quarter for stock picking alpha in at least seven years.
Hedge funds benefit from improving equity markets
Among the major hedge fund strategies, American Equity Long/ Short funds did the best last month with a 2.1% gain, but they’re still lagging the S&P 500 for the year. Long/ Short funds are down 2.9% year to date, compared to the S&P 500’s 1.4% gain for the year.
Carlson Capital's Double Black Diamond Fund posted a return of 3.3% net of fees in August, according to a copy of the fund's letter, which ValueWalk has been able to review. Q3 2021 hedge fund letters, conferences and more Following this performance, for the year to the end of August, the fund has produced a Read More
On the plus side though, Morgan Stanley analyst John Schlegel and team said that last month was the markets’ first positive month for the year as they saw their best returns since October. Last month hedge funds were net buyers, although they describe this buying as “moderate in size and driven by short covering.” Other than North America, most regions recorded net buying last month, and the Morgan Stanley ream reports that the global long/ short ratio climbed further from its post-crisis lows.
Hedge funds doing poorly at stock picking
Schlegel and team said Equity Long/ Short hedge funds saw a decline of 4% in stock picking alpha during the first quarter, which they said was not only the worst quarter in at least seven years but also the worst quarterly return by over 2%. They base these numbers on total alpha as measured by “the difference between long and short appreciation.” They said the last record for worst quarterly stock picking alpha performance was set in the third quarter of 2009 when total alpha declined 1.7%.
This year has just been bad in general in terms of generating alpha, the Morgan Stanley team added as it has been in the negative so far every month of the year. Last month, they note that long alpha was essentially flat, while short alpha was negative. Further, they said this was the second month in a row in which shorts drove negative alpha.