Hedge Fund Alpha – Hedge fund performance continues to improve as the year drags on, with small gains reported for the month of September. However, funds still aren’t having a spectacular time of things, as on average, they gained less than 1% during the month.

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Hedge fund performance on the rise

Morgan Stanley Prime Brokerage analyst John Schlegel and team said in their October 6 “September 2016 Hedge Fund Recap” that the average hedge fund performance across all strategies was a gain of 0.66%. Here’s a quick summary of recent hedge fund performance:

Year to date, funds are only up 1.68%, on average. The analysts added that American Equity Long/ Short funds posted an average return of 0.83% in the month, setting their year-to-date return at 2.59%. Global Equity Long/ Short hedge fund performance amounted to a 1.1% gain in September, bringing the average fund in this category to a year-to-date increase of around 15 basis points.

[drizzle]The Morgan Stanley team added that stock picking alpha was positive last month with long positions continuing to rebound around the world.

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This is good news for long-only funds, as this is the first time this year that longs have flipped into the green, and it has come only after a rebound lasting three months. For the full third quarter, long alpha was the best since the first quarter of 2013 and comes after four hard quarters.

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Hedge funds buy global equities

They explained that U.S. style factors are continued to help long positions and take a bite out of shorts in September, just as they have been doing in recent months.

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They also report that size is the biggest contributing factor to this trend because of the continuing preference for small caps.

Hedge funds were net buyers of global equities last month, but only marginally. Asia, excluding Japan, racked up the majority of the buying. Equity Long/ Short fund leverage declined on a net basis month over month across regions. Gross, on the other hand, was more mixed.

Hedge funds buy cyclicals

The MS team reports that in the U.S., net activity tapered off in September, although hedge funds bought cyclicals and sold defensives.

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They add that net exposure to cyclicals stood at its highest level this year, while exposure to defensives reached its lowest level since 2014. In the U.S., Technology is still the favorite sector among hedge funds with the highest net buying year to date. Interestingly, Energy is close on its heels after it made huge gains in September.

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They found that Europe was the most-sold part of the world after a big reversal, as September’s net selling followed two months of net buying. Information Technology recorded the most sales of any sector in Europe in another big reversal after six months of net buying. The Long/ Short ratio in Europe edged lower slightly between August and September, while European Equity Long/ Short leverage declined 4% on a net basis but increased 6% on a gross basis month over month.

 

In Asia, net buying continued for the fourth month in a row as hedge funds boosted Asian stocks. Long/ Short ratios neared their highest level in a year, both for Japan and also Asia ex-Japan. Chinese Information technology ADRs were still a favorite of hedge funds, marking the third month in a row for this trend. Hedge funds also reversed to moderate net sales of Japanese equities as the Nikkei 225 slipped 2.6% during September.

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