The $3 trillion hedge fund industry entered 2017 with similar performance trends it displayed in 2016. January’s gains were the eleventh month of positive performance produced by hedge funds in the last twelve. During this streak, the overall industry has returned an average near 10%, despite negative returns from managed futures funds and lagging aggregate returns from macro strategies.

2016 Hedge Fund Letters

For the second consecutive month, over 70% of all hedge funds produced positive results. For an industry needing to bolster its representation within institutional portfolios, broad satisfaction with performance is an excellent place to start.

Highlights

  • Hedge funds returned an average of 1.16% in January 2017.
  • Distressed funds began the year with firmly positive results, an indication their exposures to energy sector credits continue to be accretive to performance.
  • Managed futures funds continued to lag their industry peers. Within the ten largest products, however, there was clear evidence some managed futures funds are able to succeed in the current market environment.

Hedge Funds – 2016 Trends Continued into 2017; Distressed Near the Top, Managed Futures Lagging

Hedge funds returned an average of 1.16% in January. The $3 trillion hedge fund industry entered 2017 producing its eleventh month of positive performance in the last twelve. During this streak, the overall industry has returned an average near 10%, despite negative returns from managed futures funds and lagging aggregate returns from macro strategies.

Performance Overview

  • For the second consecutive month, over 70% of all hedge funds produced positive results. For an industry needing to bolster its representation within institutional portfolios, broad satisfaction with performance is an excellent place to start. Additionally, despite certain underperforming segments, the industry has been able to consistently outperform a global stock/bond mix, net of fees, since 2015.
  • Distressed hedge funds began 2017 where they left off in 2016, producing industry leading returns. January returns continue to show positioning within energy sector credits continues to be accretive to performance.
  • Managed futures produced mixed, but ultimately negative returns to begin 2017. Flows for the group have been driven by the largest products in the universe, and while flows were lowest among $1b+ strategies, the very largest segment of the universe performed better. While average returns were still negative among the ten largest managed futures funds, four of the ten were positive in January. It is important to remember these primarily quantitative strategies will react differently to global markets trends and shifts, and that while aggregate performance may be negative, there are products able to navigate successfully.

Hedge Funds eVeestment

  • Activist strategies started 2017 on a positive note, however not near the top as they were in 2016. Given the apparent desire of leadership in the US to have an influence on capital markets, 2017 should be an interesting year for activist funds.
  • For the most part, the 10 largest funds in each category tended to outperform their peers in January. While at an aggregate level this was not the case due to under-performance of the macro & managed futures segments and their positions within the ten largest funds, generally the largest funds had a decent relative start to the year.
  • Commodity funds, the only asset class segment with positive flows in 2016, also began the year with a decent month in January. Contrary to managed futures products, investor allocations have generally been rewarded, so far.

Hedge Funds eVeestment

Trend of EM Outperformance Continues into 2017

Emerging market strategies had an excellent start to 2017, driven by strong returns from funds focused on each of the BRIC countries. January’s returns were the universe’s largest since March 2016. Performance was broadly positive with 90% of EM strategies reporting a positive start to 2017.

Hedge Funds eVeestment

Performance Overview

  • Exposure to Asia was clearly the best performance driver on a regional basis, while exposure to Brazil was most beneficial on a country specific basis. Managers domiciled in mainland China also had a strong start to the year.
  • It will be interesting to follow how investors continue to react to performance from China-focused managers. What was an encouraging string of returns during the summer months of 2016 ended with three straight monthly losses in Q4 2016. Normally, we would expect a rash of losses to be followed by redemption pressures, but we shall see how strong is the conviction of investors in China-focused hedge funds.
  • Managers focused on opportunities in Russia have been in the midst of a very favorable market environment. Returns in 2016 we nearly the best in the entire industry, second only to Brazil-focused funds. The exposure received a bump in the month following the election of President Trump to produce industry leading Q4 2016 returns, and 2017 has continued to show that investors who have stuck with the normal volatility produced by exposure to the country have been rewarded.

Article by eVestment