The hedge fund industry has produced its ninth consecutive month of aggregate gains in July, and the difference between average gains and average losses was relatively narrow during the month. With much of the industry benefiting from surging equity markets, one would expect investors to be satisfied. However, there are segments which are not keeping pace, or are struggling to extract gains from how current global themes are affecting markets, and their relative valuations in the short-term. The result is likely an investor base which is feeling less positive about recent allocations than broad performance results would indicate.

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Highlights

  • Hedge funds returned an average of +1.21% in July, and are +4.77% YTD in 2017.
  • Activists have overtaken long/short equity as the industry leading
  • Emerging markets’ run of elevated outperformance continues, led by Brazil in
  • Managed futures funds were mostly positive in July, but the largest macro funds are underperforming.

Industry Positive for 9th Consecutive Month, Most Broadly Positive Month in a Year

Hedge funds returned an average of +1.21% in July 2017. Year-to-date the industry is +4.77%, with three quarters of all strategies in positive territory. Equity exposure continues to produce the best performance, with activists and long/short equity leading in 2017.

Hedge Funds Return

Key Points

  • July was the mostly broadly positive month since July 2016.
    The last two times the industry produced a higher proportion of funds in the black during a month, the difference between average gain and average loss was much greater than it was in July 2017. The implication is that not only were most funds  generally not very wrong in their positioning.
  • Activists are the leading non-EM strategy in 2017.
    Strong equity markets have aided activist funds in 2017. The universe of typically concentrated equity-focused managers had been lagging only long/short equity among major strategy returns in 2017, but that has changed.
  • Managed futures funds need to produce more months like July.
    In the last two years (24 months), 54% of monthly returns from managed futures strategies were negative. The result being a -2.13% return. The statistics are worse for the ten largest funds in the universe (58% and -3.35%). In the same time frame, investors allocated $15.6 billion into the strategy, even more if you go back another six months.
  • Credit and LS Equity producing similar win rates, but very different returns.
    Both universes have provided investors with very good chances of selecting managers that have produced gains this year (84% winners YTD for both). The average gain from long/short equity, however, has been nearly 2x that of credit, and the difference in average loss has been of roughly the same magnitude (10.0% vs. 5.3%, and -6.2% vs. -3.3%, respectively).
  • Macro fund investors are likely dissatisfied with recent allocations.
    In the last three months, only smaller FX funds have underperformed the largest macro funds, and 6 of the 10 largest reporting funds are negative in 2017. This is not positive for the universe which has seen the most inflows in 2017.

Led by Brazil in July, EM Outperformance Continues into Seventh Month of 2017

Emerging market strategies again produced returns more than double that of developed market strategies in July, the seventh consecutive month of out-sized outperformance in a row. China and India continue to lead for the year.

Hedge Funds Return

Key Points

  • India and China exposure leading the overall hedge fund industry, by far.
    India-focused funds are up nearly 25% in 2017, China-focused up over 21%. Only 3.5% of all developed market funds reporting through July have done better than India funds in 2017, and only 2.2% have performance better than those focused on China.
  • Brazil funds had a sharp rebound in July, return stream highly volatile.
    In the last year-and-a-half, Brazil-focused fund returns have been above +7%, or below -7% six times. Fortunately for investors, those times have been more positive than negative.

Article by eVestment