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Industry Halts 3-Month Drawdown On Strength Of Systematic Hedge Funds

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Industry Halts 3-Month Drawdown On Strength Of Systematic Hedge Funds by eVestment

Systemic Hedge Funds – Managed futures and macro hedge funds benefit in commodity turnaround, credit fund woes continued.

The hedge fund industry produced an aggregate return of 0.25% in February 2016. The gains were driven by returns from managed futures funds, despite continued losses from managers targeting credit opportunities. The slight gain halted the overall industry’s three consecutive months of performance declines.

A little more than half the industry produced positive results in February, a large improvement over January when only 28% of funds produced positive returns. Interestingly, the average positive return in February was very similar to January (+2.68%, +2.57%), but average losses were much less severe (-2.33% vs. -4.63%). The severity of the losses in January were worse due to large negative returns from equity exposure across multiple strategies.

Macro hedge funds had a firmly positive month in February

Macro hedge funds followed a positive start to 2016 with a firmly positive month in February. Whether a fund’s position generation process is at the manager’s discretion, or a quantitative process, appeared to make a big difference in funds’ abilities to outperform in February, a month where significant directional shifts occurred across various markets. 90% of quantitative macro funds were positive in February compared to only 45% for discretionary managers.

Managed futures products are off to a fast start in 2016 and lead all other strategies’ performance by more than 2x. The universe started 2015 similarly, but ultimately ended with elevated volatility and aggregate performance declines, though 2015 losses then were driven by smaller managers. In 2016, the distribution of performance by size is more similar, both large and smaller managed futures funds have performed well.

Systematic Hedge Funds
Systemic Hedge Funds

Credit hedge funds down -0.73% in February

Losses in the credit space continue to be a drag on overall industry returns. February’s decline of -0.73% is the universe’s fourth consecutive monthly decline and seventh in the last eight months. Given the diversity of products within the universe, pinning losses on one factor is difficult. However, the universe’s aggregate declines align well with difficulties in the US high yield markets, particularly energy and within the European banking sector.

Losses in the credit space extended to funds whose strategy involves origination and financing, with losses highest amongst products focusing on lending back by real estate assets. The universe is near the bottom of the industry in 2016 after being at the top in 2015.

Systematic Hedge Funds
Systemic Hedge Funds

Commodity hedge funds remain positive

Commodity hedge funds, which have seen investor sentiment shift in their favor in recent months, were positive in February and YTD returns have also shifted positive.

Emerging markets rebounded in February after suffering their largest losses to begin a year since 2008. The commodity price reversal in February likely attributed to the gains as Brazil and Russia both rebounded, more than offsetting January’s declines. Brazilian equities in particular were the primary source of February’s gains.

On the other end of the spectrum, performance from products targeting India declined significantly in February, losing -8.44% during the month. Losses in February follow similar losses in January and the India-focused fund universe is now -15.65% in 2016. February returns within the group were very similar to the country’s equity markets: the S&P India benchmark was -8.47% in February.

Losses from China continued into February, albeit at a far more muted level than the -10.63% decline in January. Performance was not universally negative during February, a good indication homogeneity is not rampant within the universe. China-focused funds are -11.65% to begin 2016 after returning an average of nearly 8% last year.

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Sheeraz Raza

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