Hedge funds gained 1.01% during the month of December, with 2016 returns coming in at 4.48%. Meanwhile, underlying markets as represented by the MSCI AC World Index (Local) gained 2.38% in December with its 2016 returns coming in at 7.37%. North American equity markets traded higher in December as the Trump-driven reflation theme buoyed markets in a somewhat ‘honeymoon’ period post-election. The S&P 500 Index gained 1.82% during the month, with the DJIA also up 3.34%.
Indeed, central bank actions in the developed world outside of the US have helped to mediate year-end jitters to some extent. The ECB and BOJ remained committed to their current policies, which in turn also supported the performance of underlying equity markets. Ongoing political and economic events hold much uncertainty in store for 2017, and it remains to be seen how long markets will continue sing to the tune of Trump’s rhetoric once he takes office later this month.
Below are the key highlights for the month of December 2016:
- Hedge funds gained 1.01% in December and 4.48% for annual year 2016 with underlying markets, as represented by the MSCI AC World Index (Local) up 7.37% for the year. Almost 19.7% of the hedge funds posted double digit returns in 2016, up from 17.6% in 2015.
- Assets under management shrank for the first time since 2008. The hedge fund industry contracted by US$21.8 billion in 2016, with investor redemptions of US$43.4 billion offsetting manager performance-driven gains of US$21.6 billion. In 2015 the industry grew by US$108.7 billion, with US$80.7 billion of investor allocations driving the bulk of the industry growth.
- Among developed mandates, North American and Japanese hedge funds gained 7.77% and 0.32% respectively in 2016 while European fund managers were down 0.12%.
- Emerging market mandates have preserved their gains for 2016 – up 7.31% for 2016 with strong showing from underlying Latin America and Eastern Europe/Russia mandates. Frontier markets investing hedge funds, as represented by the Eurekahedge Frontier Markets Hedge Fund Index are up 10.76% for 2016.
- Among strategic mandates, distressed debt hedge funds posted the best 2016 returns, gaining 12.02%, followed by event driven and relative value hedge funds which were up 9.70% and 6.64% respectively.
- The Eurekahedge Long/Short Equities Hedge Fund Index is up 3.89% for the year 2016 while underlying long-bias equity hedge funds gained 5.82%. This compares with 3.15% and -0.34% respectively for 2015.
- Asia ex-Japan hedge funds posted their fifth month of losses in 2016, and were up 0.66% for 2016, down from a 6.44% gain in 2015. Greater China mandates led much of the weakness during the year, posting their first annual loss in the last five years down 4.66% in 2016 compared with a gain of 10.24% the year before.
- Among volatility-focused hedge funds, relative value volatility hedge funds posted the best performance for 2016, gaining 7.79%, followed by short volatility hedge funds which gained 5.37% over the same period.
European and North American managers top the table among regionally mandated peers, with respective gains of 1.20% and 1.18% during the month. European and North American equity markets performed well during the month, ending the month on a higher note compared to their peers in Asia and Latin America. Following some challenges in Italian referendum, the ECB remained committed to its asset purchase program which helped to support the performance of equity markets in the Eurozone area. Latin American hedge fund managers were up 0.80%, despite the weakness in Brazilian equities during the month. This is followed by Japan hedge fund managers who gained 0.60%, with the Nikkei 225 Index climbing 4.40% in December thanks to the weakness in the Yen versus the greenback. On the other hand, Asia ex-Japan hedge fund managers languished into negative territory this month, down 0.50% with much weakness being led by underlying Greater China hedge fund managers (-2.24%) as the Chinese equity markets weakened considerably. India mandated hedge funds were also down this month, declining 0.84%.
As of 2016, Latin American hedge fund managers gained an impressive 19.25%, the best performing region for the year among its peers. North American hedge fund managers were up 7.77% for the year followed by emerging mandated hedge funds which gained 7.31% boosted by the strong performance of underlying Eastern Europe and Russia, and Latin American mandated hedge funds this year. Within Asia mandated funds, Japan hedge funds finished off the year in positive territory, gaining 0.32% while Asia ex-Japan managers climbed 0.31%. European managers were the only managers to languish into negative territory for the year, down 0.12%.
Performance was positive across strategic mandates, with event driven hedge funds topping the table, gaining 1.61% during the month. This is followed by macro and CTA/managed futures hedge funds which gained 1.24% and 1.00% respectively. Key themes for macro and CTA/managed futures hedge funds hinged on the reflation, with short exposure into gold and long USD against major currencies contributing to performance of these mandates. Among underlying sub-strategies within the CTA/managed futures mandate, trend following hedge funds posted the best gains, up 1.11% during the month while FX and commodity focused hedge funds were marginal to flat. Indeed, for some trend following managers, going long on equity futures and the greenback against other currencies have contributed to significant gains this month.
Long/short equities hedge funds gained 0.99% during the month, with well-performing developed equity markets contributing to the performance of managers of this mandate. Underlying equity long bias hedge funds posted the best gains among sub-strategies within the long/short equities mandate, gaining 1.52% while equity short-bias managers declined 1.19% during the month. Central bank actions in the developed world have helped to mediate some year-end jitters to some extent. The ECB’s commitment to proceed with its asset purchase program has helped to restore confidence in the market despite the developments surrounding the Italian referendum earlier in the month. The BOJ has also left its policy unchanged, while at the same time reassessing Japan’s economy to indicate moderate recovery following improvements in export volumes helped in part by the relative weakness in the Yen over the recent months. The Nikkei 225 Index climbed 4.40% during the month, thanks to the strength in the greenback.
Fixed income and multi-strategy hedge funds were also up this month, gaining 0.97% and 0.78% respectively, followed by arbitrage hedge funds with gains of 0.77%. Relative value hedge funds gained 0.52% for the month, with strength led by underlying relative value volatility hedge funds, represented by the CBOE Eurekahedge Relative Value Volatility Hedge Fund Index, which gained 0.65% during the month. Distressed debt managers were also in positive territory during the month, gaining 0.43%.
As of 2016, distressed debt hedge funds were the best performing strategy for 2016, with major themes during the year lending a ‘supportive’ environment for managers of this mandate to reap good gains. The recovery in oil prices and the repricing of cheap debt, together with tepid but improving economic data have also supported the recovery of underlying debt and equity valuations of distressed