By Colin Lloyd
As we approach the year end, 2016 is shaping up to be the best year for hedge fund performance since 2013. For managed futures, which showed such promise in Q1, this has been another year in the wilderness – the Barclay CTA Index has delivered negative returns in five of the last ten years.
Here’s how the hedge fund and managed futures scorecard looks after 11 months:-
|Index||November||No of funds||YTD|
|Barclay Hedge Fund Index||1.15%||1988||5.24%|
|Equity Long Bias Index||3.41%||268||4.07%|
|Healthcare & Biotechnology Index||3.29%||31||-2.37%|
|Distressed Securities Index||1.70%||32||12.50%|
|Event Driven Index||1.41%||85||9.84%|
|Equity Market Neutral Index||1.35%||67||0.76%|
|Global Macro Index||1.29%||138||0.02%|
|Merger Arbitrage Index||1.20%||37||5.12%|
|Equity Long/Short Index||1.02%||302||1.26%|
|Pacific Rim Equities Index||0.93%||27||-0.15%|
|Fixed Income Arbitrage Index||0.83%||30||4.00%|
|Multi Strategy Index||0.60%||75||4.09%|
|Fund of Funds Index||0.57%||298||-0.98%|
|Convertible Arbitrage Index||-0.39%||15||4.18%|
|European Equities Index||-0.86%||79||-6.31%|
|Emerging Markets Index||-1.54%||218||9.92%|
% of funds
|Barclay CTA Index||0.01%||81.05%||-1.29%|
|Currency Traders Index||0.69%||79.17%||1.80%|
|Discretionary Traders Index||0.38%||84.04%||-1.24%|
|Diversified Traders Index||0.13%||81.11%||-2.71%|
|Systematic Traders Index||0.05%||80.79%||-1.81%|
|Fin./Met. Traders Index||-0.17%||91.55%||0.67%|
|Agricultural Traders Index||-0.47%||70.37%||-2.52%|
The Barclay Hedge Fund Index rose 1.15% in November, which takes the YTD performance to 5.24%. After the US election result, markets adjusted rapidly, with developed market equities, generally, rallying. Only three sub-sectors posted negative performance – Emerging Markets (-1.54%) European Equities (-0.86%) and Convertible Arbitrage (-0.39%). YTD these indices look rather different with Emerging Markets still up +9.92% – the second strongest sub-index performance – whilst European Equities extended their YTD losses to -6.31%.
The top performing sub-index for November was Equity Long Bias +3.41% YTD +4.07%, closely followed by Healthcare and Biotechnology +3.29%, which helped it to pare YTD losses to -2.37%.
Distressed Securities put in another solid month +1.70% helping them to leapfrog Emerging Markets to top the leader-board with a YTD return of +12.50%.
Also worth mentioning is the Global Macro Index, which produced a +1.29% return, helped back into positive territory YTD by the continued rise in the US$ and rising US Treasury Bond yields.
The Barclay CTA Index trod water finishing the month at +0.01% and underwater YTD at -1.29% . Currency Traders extended their lead +0.69% leaving them +1.80% YTD. The trend of the US$, especially versus the JPY and EUR, undoubtedly helped. Financials and Metals Traders suffered from the sharp decline in precious metals (-0.17%) but remain in second position YTD (+0.67%). The price of Copper, which surged 19% to an 18 month high, may have helped to temper losses elsewhere.
Agricultural Traders (-0.47%) suffered from reversals in a number of commodity markets. Sugar continues to give back gains made earlier in the year as new supply feeds through. Soybean Oil has begun to recover after several month of decline in the Soybean Complex. Lean Hogs and Live Cattle have also begun to rise in price after a depressed summer. Trader losses were offset by other markets, notably Coffee, which continued its rally to test the highest levels since January 2015.
The majority of macro trades revolved around the strengthening US$ and rising government bond yields.
Paul Brewer’s Rubicon gained almost 20% in the first 18 days of November reversing losses – they had been down 15% at the end of October. Brevan Howard’s BH Master Fund was up 5.6% to the 18th putting it on track for its first positive year since 2013.
The US election also produced some winners, such as Paulson, benefitting from a near doubling of the price of Fannie Mae and Freddie Mac – which they had been holding in anticipation of a Trump win.
Politics was not a boon for all. Several emerging markets suffered torrid set-backs, nonetheless, they attracted some capital inflows. Gramercy, an EM specialist, raised almost $1bn for a distressed emerging market debt fund in anticipation of the damage rising US interest rates and a stronger dollar will inflict on EM corporate borrowers.
According to a survey conducted by Greenwich Associates, 67% of institutional investors intend to maintain their current allocation to hedge funds over the next three years. Of the remainder, 18% said they will increase, whilst 13% will reduce investments.
Institutional fee pressure remains, despite the vote of confidence the Greenwich survey implies. Always with a finger on the pulse of the industry, specialist alternative investment consultants, Albourne Partners, announced the launch of a hedge fund ‘price discovery’ initiative dubbed “The Matrix”.
Through “The Matrix”, investors will be able to compare hedge funds based on an “expected share of return” which takes into account expected returns and volatility. It will also be possible for managers to post open and closed proposals to investors based on specific fee deals.
The press continues to focus on institutional investor redemptions but there have been several developments suggesting moves to the contrary. The $63bln Massachusetts Pension Reserves Investment Trust (PRIT) – which is already an investor with 28 hedge fund managers – is planning to establish a dedicated emerging hedge fund manager programme focused on global macro and CTA strategies.
The $9.8bln Michigan State University, has gone even further than the PRIT, dropping its allocation to traditional hedge funds in favour of quants – Renaissance Technologies and Two Sigma are among their candidates, however, they have also allocated $35mln to a direct lending manager.
Michigan State are not alone in their focus on direct lending, according to a survey by State Street, 47% of Institutions predict that hedge funds will play an important role in providing liquidity as banks and other liquidity providers withdraw.
Hedge Fund managers have had a challenging year with a record number of firms closing. According to Eurekahedge during the first nine months 566 closed versus 518 start-ups. In 2015, by contrast, 877 hedge funds opened, 833 closed. The relatively distressed state of the industry may present an opportunity – Credit Suisse Asset Management, following in the wake of Goldman Sachs and Blackstone, is raising a $2bln fund, Anteil Capital Partners, to buy minority stakes in 10 to 12 hedge-fund firms.
Elsewhere in the hedge fund sector, consolidation continues, especially for fund of funds. Given the difficulties facing Italian banks it is, therefore, not surprising that UniCredit agreed to sell Pioneer Investments to Amundi for $3.75bln.
Just in case you are thinking the hedge fund industry is no longer lucrative, Marshall Wace saw performance fees more than double. The firm reported an 83% rise in total fees for the year to 29th February – a leap-year indeed.
If you are a hedge fund manager that can generate consistently high returns, the $133bln Texas Teacher Retirement System might be worth contacting. They are planning to implement a new hedge fund fee structure called “1 or 30” designed to provide investors with 70% of the alpha.
The Greek philosopher, Heraclitus, is quoted as saying “Change is the only constant.” As we look ahead to 2017, in the alternative investment industry, that seems truer than ever.