Hedge funds extended their gains for the year and were up 0.92%1 during the month of July based on preliminary numbers. Meanwhile, underlying markets, as represented by the MSCI AC World Index (Local), were up 1.64% over the same period. Returns were largely positive across the board with all key regional mandates in the green with emerging market mandates excluding Eastern Europe & Russia delivering the best returns. The US economy continues to march along at a steady pace, with a weakening USD and the gain in oil prices spurring inflation expectations and making a stronger case for a Fed rate hike later this year. However, the political deadlock in Congress; where President Trump still appears to have his hands tied to push through with his reform agenda (the recent sanctions against Russia which Trump approved quite begrudgingly being a recent case in point); as well as the upcoming fiscal debt ceiling are likely to force the Fed to pursue its rate hike more cautiously in the second half of 2017.
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Over in Europe, the growth momentum appears to be going strong with a strengthening Euro adding to gains for foreign investors in the region. Emerging markets (EM) led by India, China and Brazil have also contributed to strong gains for hedge fund managers as global risk appetite remains strong with a weakening USD favouring exposure to EM markets where valuations remain relatively cheap.
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Below are the key highlights for the month of July 2017:
- Hedge funds gained 0.92% in July with underlying markets as represented by the MSCI AC World Index (Local) up 1.64% over the same period. On a year-to-date basis, managers gained 4.32% while underlying markets were up 9.41%.
- Among developed market mandates, Japanese hedge funds led on a year-to-date basis with gains of 5.63%, followed by European hedge funds up 4.25% and North American hedge funds up 3.39%.
- Among strategic mandates, equity long bias hedge funds led on a year-to-date basis, gaining 9.81%, followed by event driven hedge funds posting a return of 6.65% and multi-strategy hedge funds with 6.39%.
- Emerging market mandates continue to outshine their developed market peers, with India, Greater China and Asia ex-Japan hedge funds witnessing gains of 19.08%, 18.22% and 12.37% respectively. Latin America and Eastern Europe mandated funds were also up 11.06% and 4.03% for the year.
- Performance across fund sizes has varied, with mid-sized hedge funds (US$100 million to US$500 million) gaining 4.55% year-to-date - outperforming their billion dollar peers by almost 185 basis points for the year.
- The Eurekahedge AI/Machine Learning Hedge Fund Index was up 5.89% for the year, outperforming traditional quant hedge funds which were down 0.36% for the year.
- CTA/managed futures strategies dropped 1.95% for the year, with commodity focused hedge funds dipping 1.77% while FX focused strategies are up 1.99%.
All regional mandates ended the month of July in the green, with Latin America mandated hedge funds posting the strongest gains, up 4.19% during the month and 11.06% year-to-date as emerging markets (EM) continued their strong run in 2017. Underlying markets as captured by the MSCI EM Latin America Index were up 4.23% during the month, while Brazil's Ibovespa gained 4.80% as a rise in commodity prices propped up domestic blue-chip stocks with exposure to energy. Over in Asia, hedge fund managers investing with an Asia ex-Japan mandate were up 2.25% during the month, their seventh consecutive month of gains which brings their year-to-date returns at 12.37%. Underlying Greater China investing mandates saw growth of 4.31% in July, which brings their year-to-date returns to 18.22% with strong gains accruing from exposure to Chinese internet stocks. A rotation appears to be underway in the tech sector whereby investors balance their tilt towards US tech heavy weights (witnessed early during the year) by increasing exposure to Asian tech stocks which benefit of similar underlying trends projected for the growing e-commerce sector globally. Managers allocating with a dedicated India exposure also posted strong gains with 2.10% and 19.08% returns year-to-date, helped by strong gains in the underlying IT sector.
Among the developed markets mandate, Japan investing hedge funds were up 0.68% during the month, outperforming underlying markets as denoted by the Nikkei 225 Index which was down 0.54% as the Yen appreciated against major currency pairs. The Eurekahedge North America Hedge Fund Index posted gains of 0.68% as underlying markets continued their uptrend with the NASDAQ, SP500 and DJIA up 3.38%, 1.99% and 2.54% respectively. Tech stocks were again strong contributors to performance for equity focused strategies while managers investing into commodity futures also witnessed strong gains as declining oil inventory in the US helped prop up energy prices. Over in Europe, hedge funds investing in the region gained 0.32% while the MSCI AC Europe Local Index saw gains of 0.82% during the month. A strengthening Euro and relatively cheaper valuations have helped fund managers investing into Europe post better returns this year, with 2017 returns through July coming in at 4.25% versus a flat 0.14% in 2016.
On a year-to-date basis, Asia ex-Japan hedge fund managers topped the tables, and were up 12.37%, with underlying India dedicated and Greater China mandates up 19.08% and 18.22% respectively.
Performance was generally positive across the board for strategic mandates, with equity long bias hedge fund strategies once again posting the strongest returns during the month with 1.58% gains in July and 9.81% year-to-date as equity markets continue their uptrend. A weakening USD combined with a reduction in US crude inventories helped support commodity prices, with CTA/managed futures hedge funds gaining 1.09% during the month. Underlying managers focused exclusively on commodities returning 1.19% in July while those carrying dedicated exposure to precious metals returned 1.82%. Event driven and distressed debt hedge fund managers also posted good gains, up 0.85% and 0.78% respectively, during the month. Arbitrage hedge funds grew 0.52% followed by fixed income and macro hedge fund managers which were up 0.50% and 0.30% respectively.
Detractors to the otherwise strong returns across strategies came from long volatility, FX focused and equity short bias strategies which declined 1.77%, 0.87% and 1.97% respectively.
On a year-to-date basis, equity long bias hedge funds led with gains of 9.81%, followed by event driven up 6.65% and multi-strategy hedge funds up 6.39%.
Table 1: Index Flash Strategy Return Map
1 Based on 33.76% of funds which have reported July 2017 returns as at 8 August 2017
Article by Eurekahedge