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After No Negative Months in 2017, HF Industry Returns Are Down In June

Summary

Halfway through 2018, the industry is producing very mixed results. Just over half of reporting strategies are positive for the year, and average gains are virtually on par with average losses. In many instances, segments that had been doing well in 2017 have under-performed in 2018, and in some cases the opposite is true.

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Q2 hedge fund letters, conference, scoops etc

This is not a situation that inspires investor confidence, but we must also remind ourselves to not focus on the short term, and to make sure we look closely at the numbers. For some, large allocations made in 2017 are being met with recent losses (long/short equity), but for others, universe-level declines mask relative outperformance from those accepting large new allocations in 2017 (large macro).

The landscape of the industry is muddled, as one would expect with near flat first-half returns. With net investor flows teetering from one side of zero to the other in recent months, it’s clear investors are waiting, and watching their recent allocation decisions closely.

Highlights

  • Hedge funds returned an average of -0.51% in June, +0.37% in Q2, and are now +0.16% in 2018.
  • There were elevated losses within long/short equity strategies in June.
  • Large managed futures products rebounded slightly in June, but prior 2018 losses still far outweigh any recent gains.
  • EM returns were highly negative, led to the downside by China-focused funds.
  • Large macro funds continue to outperform smaller peers.

After No Negative Months in 2017, HF Industry Posts Third Aggregate Decline of 2018 in June

Hedge funds returned an average of -0.51% in June, +0.37% in Q2 2018, and are +0.16% in the first half of 2018. Emerging markets continued to lead to the downside, while managed futures, macro and quantitative equity strategies struggle.

Hedge Funds 2Q

Key Points

  • The hedge fund industry finds itself at an inflection point.
    Halfway through 2018, the industry is producing very mixed results. Just over half of reporting strategies are positive for the year. Those that are positive are up an average of +5.3%, while those in the red are down an average of -5.3%. In many cases, what had been doing well in 2017 has underperformed in 2018, while in other cases the opposite is true. This is not a situation which inspires confidence, but we must also remind ourselves to not focus on the short term.
  • Investors likely feel better about macro fund returns than the group’s aggregate returns would imply.
    Macro strategies were a leading asset gaining group in 2017 and at the top in 2018, and negative aggregate returns in 2018 seem to imply dissatisfied investors. With the ten largest reporting products gaining +0.18% in June, the segment which has attracted the lion’s share of new allocations is actually performing relatively well, even outperforming the S&P 500.
  • Large managed futures funds rise in June, but lag all strategies in 2018.
    Aggregate returns from the largest managed futures products were among the best subsets of the industry in June. Average losses of -3.78% in the first half, however, keep the group behind all other non-EM-focused segments in the industry in 2018.
  • Several large long/short equity funds produced elevated losses in June.
    This is a segment which attracted a lot of new capital in 2017, but now finds itself among the list of underperformers. The industry shoots itself in the foot when those segments which gain new assets in one period are loss-leaders in the next. Managed futures is feeling the pain of that role right now.
  • Origination & financing funds (which includes direct lending) leading all strategies in H1.
    Led by real estate lending products, this subset of credit strategies has been producing above average results this year. Fund selection is key, however, as elevated losses have been present within the universe.

Emerging Market Losses Accelerated in June, the Group’s Fifth Consecutive Monthly Decline

Hedge Funds 2Q

Key Points

  • China leading to the downside in June, but India overtakes Brazil for losses this year.
    A strong dollar and developing trade wars have been hurting emerging markets. In June, China-focused funds fell most, pushing the group into negative territory in 2018. June losses were nearly rivaled by India and Brazil exposures.
  • Middle East/Africa is the sole positive EM sector in 2018.
    Similar to the theme within direct lending strategies, while ME/A products have generally been outperforming in 2018, there are pockets of large losses, notably with exposure to Turkey.

Article by eVestment