- Q3 2016 hedge fund letters
- Q2 2016 hedge fund letters
As energy and agriculture commodity prices generally climbed higher in September, and developed equity markets stayed mostly positive, the performance trends across the hedge fund industry from the prior month have mostly continued.
From a strategy perspective, distressed managers have emerged as industry leaders, and activists’ strategies have benefited despite softening equity markets. Returns from both macro and managed futures universes are illustrating the divergent opinions and differing quantitative interpretations of global market events and their influences in both absolute and relative pricing trends.
Activists Continue to Climb, Managed Futures Fall
Hedge funds gained +0.73% in September, and +2.91% in Q3 2016. The industry average is +4.40% YTD in 2016.
For a third consecutive month, discretionary approaches to opportunities in corporate capital structures, including equity and credit markets, produced the best returns across the hedge fund industry. September marked the eight consecutive positive month for aggregate hedge fund returns, and the volatility of returns (difference between average positive and negative returns) was the lowest in at least four years.
- As oil prices rose for a second consecutive month, distressed funds have again produced a strong month of aggregate returns. Q3 returns of +4.81% and YTD returns of +7.99% place the strategy at the top of the industry in 2016. The inverse relationship between energy credit default risk and distressed hedge fund returns has been evident since late-2014, in that as default risk increased or decreased, distressed hedge fund performance tended to fall, then rise, respectively.
- It is interesting that as equity markets have cooled in August and September, activist hedge funds’ aggregate returns have outperformed. This could be a sign that as the factors which had broadly been positive for US markets become less effective, the value recognized by activist investors becomes more sought after. Activist funds outperformed all other strategies in Q3 2016.
- The managed futures segment may be facing a difficult stretch for investor flows in Q4. The universe accepted more money than any other in 2016, through August, and its asset collection was behind only multi-strategy managers in 2015. September and Q3 performance trailed the industry, and several large funds are in the midst of a difficult stretch. As other strategies have been in a process of reversing, or at least outperforming their disappointing 2015 returns, many managed futures strategies have left investors with concerns.
- Macro hedge fund performance was similarly distributed to managed futures in September, basically half posting gains versus losses, however the universe produced slightly positive returns. The universe of large macro managers has produced YTD returns that are very much all over the map. The distribution of returns is highly indicative of the differing thematic views, and their market influences, across the predominantly discretionary group. To say the universe is underperforming would clearly overlook the many large macro strategies that are outperforming even the distressed and activist universes.
- Commodity funds enjoyed a welcome reprieve in September from a two-month slide causing losses near 2%. The rebound in agricultural commodity prices along with rising energy prices were the primary cause for universally positive returns.
Comparison of Distressed Hedge Funds to Energy Sector Credit Markets
This chart contains the cumulative returns for the S&P/TSX energy index compared to distressed hedge fund returns. The chart is meant to illustrates the positive relationship between distressed hedge fund performance and the perceived strength or weakness of corporate structures and valuations in the energy sector.
Commodity Rally Supports EM Funds
After a difficult start to 2016, emerging market hedge funds have benefited as the strength of the USD declined and energy prices rebounded. While exposure to Brazil and Russia had been leading this resurgence, funds investing in China have seen positive returns in each of the last four months. The near-term rebound, and welcome consistency from the China-focused universe have come as redemption pressures have continued.
Regional Performance Overview
- Brazil fund returns cooled off a bit in September, but ended Q3 climbing +6.88% as the universe continues to be the best performing segment of the hedge fund industry in 2016. The benefits of exposure to the country have been largely influenced by the relative strength, then weakness of the USD/BRL. September’s near flat returns reflect the continuing influence of this relationship on the country’s equity valuations.
- Funds investing in Russia continued to perform well in September, resulting in Q3 returns over 10% and YTD returns over 20%. The universe still lags Brazilfocused funds in 2016, but have outperformed all emerging markets over the combined 2015/2016 period. Russia-focused funds have shown a history of either leading, or trailing all other segments of the industry. Only one time on record have annual returns averaged lower than +/-10%. This occurred in 2000, after the universe produced returns of +126.05%, -72.32% and +126.05% in 1997, 1998, and 1999, respectively.
- China-focused funds’ rebound continued in September resulting in strong Q3 returns. The recent positive run has not yet been enough to offset large losses from January. Flows for China funds, at least through August, have not yet shown investor interest in increasing their long exposure to the country.
Article by eVestment