March Was Best Month For Hedge Funds In Two Years by eVestment

Summary

Aggregate hedge fund performance in March was generally very good, however volatile currency and commodity markets and uncertain political climates (the U.S. presidential election, Brexit referendum, political turmoil in Brazil, oil prices) took a toll on managers in certain segments. March was the best month for aggregate hedge fund performance in two years and some segments, notably activist, credit and emerging markets funds, performed extremely well. For the quarter, overall industry returns were negative, the industry’s first negative Q1 since 2009 and only its second on record.

March was Best Month for Hedge Funds in Two Years

Hedge funds returned +2.29% in March and ended Q1 2016 down -0.41%.

Activists and credit strategies, two segments which had been a drag on industry performance over the last several months, produced the highest returns in March as the hedge fund industry posted its best monthly aggregate performance in two years.

Declines earlier in 2016 from long/short equity and multi-strategy funds are the primary reason the industry ended Q1 in negative territory. Q1 2016 was the industry’s first negative Q1 since 2008 and only its second Q1 decline on record.

Hedge Funds

Performance Overview

Activist hedge funds produced their best monthly performance in March since 2010. Gains from the concentrated, equity/capital structure-focused funds of +5.35% were enough to bring Q1 2016 into positive territory. Activist managers have been through a difficult stretch, declining an average of over 8% in the last nine months.

Credit hedge funds sharply rebounded from a prolonged drawdown to return an average of +3.47% in March. March returns were the best for credit funds since September 2009.

Prior to March, credit hedge funds had declined -8.14% during this drawdown, which has lasted twenty months, and lost nearly 7% in the last eight months. During the Financial Crisis, credit fund’s losses were larger, -12.74%, yet occurred in a fivemonth span. The difficulties credit strategies have faced in recent months have been significant, and rival their most difficult period on record.

Managed futures strategies saw a sharp turn in performance in March. Average returns of -1.76% bely the prevalence of large losses during the month. Over 70% of systematic managed futures funds declined in March with average losses of -4.26%. There were several directional shifts in currency pairs during the month, however, the largest influence likely came from the sharply higher move in oil prices.

Hedge Funds

Commodity hedge funds, which have enjoyed a return of positive investor sentiment in recent months, were firmly up in March, returning an average of +1.38%. Q1 returns of +1.64% put the universe ahead of most market segments for 2016, except FX and financial derivatives where most managed futures funds operate.

Nearly 70% of hedge funds produced positive returns in March. The average increase of +4.61% was the largest in more than two years. The differential between average gains and losses (-2.92%) of 753 basis points is also one of the largest in many years, rivaled recently only by the distribution of returns in January. This all illustrates the fact the industry is operating in a highly volatile set of markets, and in doing so, producing a wide dispersion of returns. For the year, 52% of the industry is positive with average gains of +4.77%.

Hedge Funds

Emerging Market Funds Near Record Returns in March

Emerging market hedge funds returned +7.50% in March and ended Q1 2016 at +1.58%.

March returns were near historical all-time monthly highs. Only two other periods produced larger monthly returns than March 2016, early 2009 and mid-1999. Both prior periods were preceded by specific and substantial financial crises.

March returns can be seen as a recognition of the significance of the prolonged distress within emerging markets over the past 18+ months, particularly within Brazil.

Hedge Funds

Regional Performance Overview

Russia-focused hedge funds produced their best monthly performance in March in more than 15 years. Not since August 2000, when Russia funds gained +20.09%, has the universe produced gains near the levels seen in March. The large spike in energy prices during the month were the primary reason for the outsized returns.

Hedge funds investing in Brazil produced nearly their best month ever in March. Returns of +16.49% during the month were the universe’s highest return since March 1999.

The major influence on emerging market returns in March was a rebound in energy and other commodity prices. It should be noted that as of writing, oil prices have since reversed course and downward pressure has resumed.

Funds investing in China produced strong returns in March, though overshadowed by performance from their other BRIC-focused counterparts. Despite good March performance, returns from China funds were still significantly negative in Q1 2016, -7.41%.

Hedge Funds

Sub-sector Overview

Energy sector hedge funds rebounded in March, +5.28%, to end Q1 in positive territory, +0.68%. The sector has exhibited high correlation to the price of oil and as such is likely under pressure again in April. The sector produced the lowest average returns of any equity market sector in 2015.

After producing near industry-leading returns in 2015, healthcare-focused hedge funds have been under pressure in 2016. March returns were positive, but the universe was still down significantly in Q1 2016, -9.80%.

Securitized credit strategies avoided much of the downward pressure their broader credit-focused peers faced in 2015, but 2016 has thus far been a more difficult year. While products that focus on mortgage-backed security markets have fared well, broader strategies, or those investing in more diverse ABS and other credit derivative markets have fared worse.

Hedge Funds