October was the hedge funds industry’s first aggregate decline since January, ending an eight-month string of positive aggregate returns. The dispersion between positive and negative performance was below the 2016 average, which implies that while the month was negative, it was not dramatically so.
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- Q3 2016 hedge fund letters
- Q2 2016 hedge fund letters
Credit exposure has produced leading market and strategy returns in 2016, a theme which continued into October. Investor interest this year, however, has generally been misplaced. Credit fund flows have been highly negative, and managed futures’ positive, yet the latter have been unable to deal effectively with dominant market trends.
- Average hedge fund industry performance was -0.76% in October, and +3.70% YTD 2016.
- Commodity fund performance shifted back to negative in October, falling -0.99%.
- Managed futures losses entered a third consecutive month. Large funds have been leading to the downside.
- Distressed has emerged as an industry leader in 2016. October’s returns separated the universe from other major strategies.
Distressed Gains and Managed Futures Losses Continue
Hedge funds returned an average of -0.76% in October. The industry average is +3.70% YTD in 2016. October was the hedge fund industry’s first aggregate decline since January, ending an eight-month string of positive returns. The dispersion between positive and negative performance in October was below the 2016 average, implying that while the month was negative, it was not dramatically so. Credit exposure has produced leading market and strategy returns in 2016, a theme which continued into October. Investor interest this year, however, has generally been misplaced. Credit fund flows have been highly negative, and managed futures’ positive, yet the latter have been unable to deal effectively with dominant market trends.
- Distressed hedge funds separated themselves from other primary hedge fund strategies in October. Average returns from the strategy pushed YTD performance near +10%. Many funds have returns north of 15% this year, however investor flows in 2015 and through September 2016 have been negative.
- We noted in last month’s update the managed futures segment may be facing a difficult Q4 for investor flows. Prior to October, the strategy had posted aggregate declines in five of seven months. With October’s losses, the universe is now negative for the year, the only primarily strategy in negative territory in 2016. The picture does not improve when comparing large to small managed futures strategies. Larger funds have received the vast majority of new strategy inflows in 2016, but YTD returns for the large-fund universe are below every hedge fund segment tracked by eVestment, with the lone exception being Africa/Middle East-focused products.
- Commodity hedge funds posted their third decline in the last four months in October. The universe remains firmly in positive territory for the year, but recent returns are already showing an impact on investor sentiment. Flows for commodity strategies were negative in September for the first time since March 2015. With another month of losses in October, investors may well continue redeeming from the only other market/strategy segment with positive aggregate investor flows in 2016.
- Multi-strategy hedge funds produced aggregate negative returns in October, however larger managers continued to produce positive results for the fourth month in a row. With positive returns in October, even though they were slight, during a month when most markets were down, is exactly the start to Q4 the large multi-strategy fund universes needed.
- Activist managers had an excellent Q3, returning greater than 5.5%, however broad equity market declines put a stop to the gains. The strategy was negative in October, however activists funds still remain one of the better performing segments of the industry.
- Long/short equity managers are not having a good year. Losses in January appeared to result in reductions of long exposures causing many not to meaningfully take part in the positive market movements. The difficult start to Q4 does not bode well for future flows to the strategy.
Emerging Markets’ Run Continues
After a difficult start to 2016, emerging market hedge funds have been on a roll since March. Led by exposure to Brazil and India in October, emerging market hedge funds also saw their first meaningful sign of positive investor sentiment in September. Returns are being driven by regional equity market gains, but not all has been positive. China-focused funds endured a small set-back in October. Along with Africa/Middle East-focused funds, China funds are lagging in 2016.
Regional Performance Overview
- Brazil funds had a very large hole to dig out of following their 30+% decline in 2015. As the BRL has rallied all year versus the USD, the effort is nearly complete. The huge downward and subsequent upward swings from the universe highlight just how much of a major influence currencies have played on the country’s fate. It is interesting to note that after losing it’s investment grade rating, and having its currency rating cut early in 2016, Brazil’s equity markets, currency and 10- year government bonds have all moved significantly in favorable directions.
- With declines in October, China sits as one of the few industry segments with negative returns in 2016. October’s declines halt a four month string of positive returns. For China funds, as for many other equity-focused strategies this year, had January’s large declines been even partially avoided, the year would not feel quite so bad. Investor outflows for China funds had finally seemed to abate in September.
- Not much has been written here about Indiafocused funds this year, but returns greater than 30% since February are hard to ignore. While 2015 was not outstanding, India funds were positive last year. Their 2015/16 returns of 18% puts them behind only Russia as the best performing segment of the entire hedge fund industry since 2015.
Article by eVestment