Hedge funds declined 0.35%1 during the month of October – their first monthly loss after seven straight months of gains. Despite being in the red this month, hedge funds have outperformed underlying markets, with the MSCI AC World Index (Local) down 1.38% in October. On a year-to-date basis, hedge funds were up 2.98% with roughly 20% of managers posting double digit returns compared with 15% over the same period last year.

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While the US Presidential Elections loomed in the background, markets moved in the rhythm of a series of economic data releases as well as central bank meetings this month. The rate hike action from the Federal Reserve seems quite likely as strong US macro data and a hawkish Fed set the stage for tapering in December though the outcome of the Presidential Elections is yet to be seen. Meanwhile global bond markets saw a sell off on the back of strong economic data from the US, UK as well as concerns over a potential end to the ECB’s QE program early next year. The concern remains that with a bottoming out in commodity prices and improving real data, inflation might materialise at a pace not anticipated by major central banks.

[drizzle]Below are the key highlights for the month of October 2016:

  • Hedge funds ended their 7-month winning streak and were down 0.35% in October. On a year-to-date basis, hedge funds are up 2.98% and have surpassed their annual gains of 1.65% posted in 2015. Global funds of hedge funds are down 1.01% for the year while long only absolute return strategies are up 8.07%. The MSCI World AC (Local) Index is up 1.94% for the year.
  • Emerging market mandates lead the gains in 2016 up 10.18% – Latin American, Eastern Europe & Russia and India mandated hedge funds are up 22.36%, 14.17% and 13.01% respectively.
  • Among developed mandates, Japan hedge fund managers were up 1.52% while North American and European managers were down 0.47% and 0.30% respectively. On a year-to-date basis, North American hedge fund managers were up 4.81% while their European and Japanese counterparts were in the red, losing 0.60% and 1.66% respectively.
  • Distressed debt hedge funds posted the best returns in October and on a year-to-date basis, gaining 2.27% and 10.99% respectively. The US$56.6 billion distressed debt hedge funds sector has grown its asset base by almost US$2.0 billion since March 2016.
  • The Eurekahedge CTA/Managed Futures Hedge Fund Index posted the steepest decline among strategic mandates in October and was down 2.11%, with underlying trend following strategies declining 3.71% while commodity focused hedge funds lost 1.19%.
  • Asia ex-Japan hedge fund managers were up 0.51% during the month, with underlying India mandated hedge funds gaining 4.60% while Greater China focused hedge funds declined 1.00% over the same period.

Hedge Funds

Main Indices

Hedge Funds

Regional Indices

Performance across regional mandates was a mixed bag in October, with Latin American hedge funds leading the table, up 4.33% during the month as manager performance was propped up by the strength in underlying equity markets in Latin America. The Ibovespa Index climbed 11.23% in October. Japanese and Asia ex-Japan managers were also up this month gaining 1.52% and 0.51% respectively as most Asian equity markets ended the month in positive territory. Solid US macro data and a hawkish Fed lend some support to the USD, which gained against major Asian currencies. The Nikkei 225 Index gained close to 6% on the back of a weaker yen. Although North American hedge funds showed some slack, down 0.47% during the month, managers were still able to beat the MSCI North American AC Index (Local) which fell 2.84% in October. European managers were also in negative territory during the month, with managers posting a decline of 0.30%.

On a year-to-date basis, Latin American hedge funds maintained their lead, gaining 22.36% over the past 10 months. Brazil’s Ibovespa index gained 49.77% year-to-date, allowing managers to gain from their long books as stabilisation in oil and commodity prices throughout the year lend some support to the performance of underlying commodity-focused stocks. North American hedge funds were also up year-to-date, gaining 4.81%, outperforming the MSCI North America AC Index (Local) by close to 1%. On the other hand, Japanese and European hedge funds were in negative territory, declining 1.66% and 0.60% respectively over the same period.

Hedge Funds

Strategy Indices

Performance was mixed across strategic mandates, with CTA/managed futures hedge funds posting the steepest decline during the month, down 2.11% in October. Markets were swayed by central bank action and better economic data from the US, even though the uncertainty of the US Presidential Elections loomed in the backdrop. Losses were extended from exposure into the bond markets with the climb in sovereign yields affecting long bond positions for managers. In the US, a hawkish Fed and better-than-expected US macro data have set the stage for a likely December rate hike with yields on US 10-year debt climbing in October as indicators pointed towards a Fed tightening. Over in Europe, yield for the German 10-year bond also climbed as the ECB left rates unchanged which markets took as a signal of an impending end to the ECB’s bond purchase program, catching managers on the wrong side of the trade somewhere into the third week of October. Exposure into commodities was also a mixed bag for some managers with underlying commodity-focused hedge funds down 1.19% during the month. Crude oil prices fell, affecting long exposure into energy as the recent OPEC meeting ended with less success than expected, adding to growing scepticism of an actual production cut. Long exposure into precious metals was also a performance detractor thanks to a strengthening dollar.

Event driven hedge funds were also negative this month, declining 1.23%, followed by long/short equities and arbitrage hedge funds which declined 0.13% and 0.02% following mixed performance of global equity markets during the month. Underlying equity long bias hedge funds led much of the weakness for long/short equity mandates, declining 0.74% during the month while short bias hedge fund managers posted impressive returns, gaining 2.80% over the same period. On the other hand, distressed debt hedge funds posted the best returns among strategic mandates this month, gaining 2.27% in October. Multi-strategy hedge funds were also up this month with gains of 1.11% followed by fixed income and macro mandated hedge funds which were up 0.48% and 0.22% respectively. Relative value managers were also up this month with a modest gain of 0.17%.

On a year-to-date basis, all strategic mandates were in positive territory with the exception of CTA/managed futures hedge funds which declined 0.13% over this period. Distressed debt hedge funds led the table with gains of 10.99%, followed by relative value and event driven hedge funds which were up 6.26% and 5.95% respectively. While still two months shy to the year-end, the strength of distressed debt hedge funds have been encouraging thus far and thanks to the oil and commodity price support earlier in the year, distressed debt managers could finish off the year on a sweeter note compared

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