As the post-US election rally accelerated, products of hedge funds concentrated in US equities did very well while those with high concentrations in Europe, and certain emerging markets, generally did not do well, while thematic and systematic strategies were among those with highly mixed returns resulting in slightly negative aggregate performance.
- Q3 2016 hedge fund letters
Michele Ragazzi's Giano Capital returned 1.9% for March, taking the fund's year-to-date performance to 1.7%. Since its inception, Ragazzi's flagship fund has produced a compound annual return of 7.8%. According to a copy of the €10 million fund's March update, a copy of which ValueWalk has been able to review, Giano's most significant investment at Read More
Despite positive aggregate returns in November, the win/loss ratio for the month was relatively low, and the dispersion of returns was generally high. When this is the case, there tends to be groups who did well, groups which underperformed, and groups which contained a little of both creating offsetting marginal returns.
- Average hedge fund industry performance was +0.55% in November, and +4.46% YTD.
- Activist strategies benefited most in November’s US equity market rally, while macro funds fell.
- Distressed funds added to their industry leading gains in November as concerns of low oil prices continued to fade.
- Managed futures funds did not reproduce their post-surprise election result gains (a la Brexit) in November, instead falling for a fourth consecutive month.
Macro Hedge Funds Decline Amid Macro Influence Surprise
Hedge funds returned an average of 0.55% in November. The industry average is +4.46% YTD in 2016.
Despite positive aggregate returns in November, the win/loss ratio for the month was relatively low, and the dispersion of returns was generally high. When this is the case, there tends to be groups who did well, groups which underperformed, and groups which contained each, creating offsetting marginal returns. Products concentrated in US equities did very well in the post-US election market rally. Those with high concentrations in Europe and emerging markets generally did not do well, and thematic/systematic strategies were highly mixed in the middle.
- Activist hedge funds, which tend to be concentrated in US equity markets, were major beneficiaries of the post-US election rally. The group contains several high profile managers, some of which have incurred notable losses, however the universe overall has produced the best combined 2015/2016 returns, and outperformed the S&P 500 in the process.
- Macro managers were generally hurt by the environment left in the wake of the US presidential election. A surge in the USD, a meaningful shift in the UST curve, and generally strong moves across many markets produced more losses than gains, and high dispersion between the two. This again underscores the risks associated with manager selection in the universe; there are many divergent views produced by many intelligent humans and/or sophisticated machines which in turn have produced a variety of possible return scenarios. Strong market influences are not generally beneficial, nor harmful, putting an overly large weight on individual manager selection, a selection which even despite historical success has by no means been indicative of more recent success.
- The managed futures universe produced its fourth consecutive monthly decline in November, the seventh down month of 2016. Large managed futures funds, the primary reason for the universe being the sole primary strategy with net positive flows in 2016, are down an average of -4.27% in 2016, through November. If it were not for the very large gains following the surprising Brexit vote in June, the universe would be having an even more disastrous year.
- After a four-month period that included three monthly losses, commodity strategies posted slight gains in November. The universe had been one of the few successful asset-raisers of 2016, until recent months. A rebound in commodity prices could only benefit this segment, and perhaps alleviate current negative investor sentiment.
- As concerns of oil price declines continue to fade, distressed funds (whose returns over the last two years have appeared highly correlated with the perceived corporate health within the energy sector) continue to produce gains. After declines to begin the year, the distressed universe has produced month after month of positive returns, resulting in the best strategy specific performance of 2016.
US Election Results Put Damper on EM Comeback
The unexpected Trump US election win and resulting resumption of the strong USD trend, which hurt many emerging markets in 2014/2015, was a primary cause of aggregate losses in the segment in November. Election results were not wholly negative for the universe, as the ensuing rebound in energy and other commodity prices was a boon to EM exporters.
Regional Performance Overview
- Brazil funds were hurt most by the resumption of the strong USD trend. Funds focused on the country have endured its rollercoaster equity markets, which have moved very much in-line with the USD/BRL relationship. Despite the nearly 10% decline, Brazil funds remain up an average of over 30% in 2016.
- Funds operating in India have been privy to a unique operating environment. Beginning with the early-month announcement of ban on certain currency notes, an event which perhaps unfortunately coincided with the US election results, Indian equity markets accelerated a decline which had begun a month earlier. While hedge funds focused on the country had continued to produce solid results through September, they were not impervious to the sharp November decline.
- Elsewhere in EM, performance was mixed. Chinafocused funds endured their second monthly loss in a row, pushing the universe further into negative territory in 2016. Funds focused on Russia were an intriguing beneficiary of the election results, and also by the ensuing surge in commodity markets. Russia funds have nearly caught Brazil funds for best performing individual segment in the hedge fund industry in 2016.
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