Despite Volatile October, North American Hedge Funds Up 5.2% YTD

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Asian managers lead despite muted hedge fund returns

Hedge funds posted their second consecutive month of negative returns in October with the Eurekahedge Hedge Fund Index down 0.24% while the MSCI World Index finished the month up 1.15%. On a year-to-date basis, hedge funds are up 3.47%, falling behind underlying markets as the MSCI World Index returned 5.18% over the same period.

Key takeaways for the month of October 2014:

·         Hedge funds posted their sixth month of negative returns for the year to finish October down 0.24%, with preliminary figures showing that investors redeemed US$1.6 billion during the month.

·         CTA/managed futures strategies were the top gainer during October, gaining 0.26% and maintaining their lead over all other strategies with year-to-date returns of 6.30%.

·         Net asset flows into hedge funds for the year stand at US$56.9 billion despite investors redeeming a cumulative of US$18.9 billion in the last four months alone.

·         China A-Share investing hedge funds posted their sixth consecutive month of positive returns and are up 9.90% October year-to-date.

·         Event driven funds reported the largest loss out of all strategic mandates at 2.09% in October, their biggest loss in a month since 2011.

·         On the whole, Asia ex-Japan was the best performing region, finishing the month up 0.55% – out of which India focused hedge funds gained 1.51% while Greater China funds were up 1.31%.

·         Eastern Europe and Russia investing funds were down 2.26% in October, and are down 13.59% year-to-date – the worst performer among all regional mandates.

Regional Indices

Investors started the month concerned about global growth prospects amid a deflationary environment, with renewed risk aversion driving the S&P 500 Index into correction territory. The market subsequently made a sharp recovery in the latter half of October; lifted by a positive slew of economic data including strong corporate earnings and GDP numbers, the US was put on track towards rate normalisation given its employment and inflation targets. As the Fed officially ended its quantitative easing program, central banks elsewhere remain fully committed to tackling deflation. The Bank of Japan (BoJ) surprised financial markets by expanding its asset purchase program, weakening the yen further against the US dollar. Meanwhile, markets in Greater China advanced on hopes that Chinese authorities will soon ease monetary conditions in a bid to engineer a soft landing for the economy.

Eastern Europe and Russia was the hardest hit region again this month as the Eurekahedge Eastern Europe & Russia Hedge Fund Index fell 2.26%, though managing to outperform the Russian RTS stock index which lost 2.77%. Japan focused hedge funds posted negative returns of 0.76% in October despite a rally in underlying markets as many managers reported exiting their positions at a loss in the middle of the month. The benchmark Nikkei 225 index recovered to close 1.49% for October as the BoJ announced an increase in its QE stimulus, with momentum further building as the US$1.2 trillion Japan Government Pension Investment Fund (GPIF) announced an increase in its allocation towards equities. On the other hand, Asia ex-Japan funds closed the month up 0.55%, with managers reporting gains from their exposure to Chinese property developers. Mangers investing with a Latin American mandate made a small gain of 0.05% in October, out of which Brazil investing funds were up 0.17% while the Brazil IBOVESPA gained 0.95%. Brazilian equities pared gains towards the end of the month as President Dilma Rousseff overcame her pro-business rival by a narrow margin to win the elections.

October proved to be a roller coaster ride for the financial markets, with volatility rising sharply during the month as the CBOE VIX Index reached 26.2 at its peak, while yields on 10-year treasuries briefly fell below 2%. Event driven funds suffered significant losses of 2.09%, with merger arbitrage funds being among the worst performers. The S&P Merger Arbitrage Index was down 1.72% in October. The month was marked by a few high profile mergers such as Shire Plc falling through, resulting in losses for managers who had made heavy bets on these companies. Multi-strategy, distressed debt and arbitrage funds also fell 0.94%, 0.87% and 0.76% respectively. Macro managers posted losses of 0.61% as many popular macro trades such as long equities and short rates went wrong with the increase in risk aversion during the middle of the month. As part of risk control measures, long/short equity managers systematically reduced their long exposures during the market correction and long/short equities reported losses of 0.06% despite an overall gain in underlying markets. CTA/managed futures managers posted the largest return out of all strategic mandates at 0.26% from gains in short energy positions as oil prices fell sharply on worries over demand. Meanwhile the divergence in economic policies between central banks continued to propel the highly profitable long US dollar trend trade. Fixed income strategies were the only other mandate in positive territory, with the Eurekahedge Fixed Income Hedge Fund Index up 0.10% in October.


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