By Colin Lloyd
As 2017 gets underway the performance patterns of last year remain evident, as this table from Barclay Hedge reveals:-
|Barclay Hedge Fund Indices||January||No of Funds|
|Barclay Hedge Fund Index||1.43%||2335|
|Emerging Markets Index||3.02%||325|
|Healthcare & Biotechnology Index||2.33%||42|
|Event Driven Index||1.83%||83|
|Distressed Securities Index||1.73%||31|
|Equity Long Bias Index||1.42%||308|
|Convertible Arbitrage Index||1.13%||11|
|Pacific Rim Equities Index||1.04%||30|
|Fixed Income Arbitrage Index||0.86%||29|
|Equity Long/Short Index||0.75%||320|
|European Equities Index||0.73%||80|
|Multi Strategy Index||0.72%||84|
|Equity Market Neutral Index||0.29%||79|
|Global Macro Index||0.01%||131|
|Merger Arbitrage Index||-0.19%||35
|Barclay CTA Indices||January||% of Funds|
|Barclay CTA Index||-0.53%||82.13%|
|Agricultural Traders Index||0.14%||84.00%|
|Discretionary Traders Index||-0.01%||83.33%|
|Currency Traders Index||-0.11%||82.61%|
|Fin./Met. Traders Index||-0.17%||88.06%|
|Systematic Traders Index||-0.72%||82.42%|
|Diversified Traders Index||-1.00%||81.14%|
The Barclayhedge Hedge Fund Index started the year with gusto. The broad index was up 1.43% in January, driven mainly by the sub-sectors which performed last year. Emerging Markets +3.02%, Technology +2.79% and Healthcare +2.33% led the charge, followed by Event Driven +1.83% and Distressed Securities 1.73%. All these sub-sectors benefited from the strong performance of stocks in general although Emerging Markets was notable for having bucked the US$ reversal after Trump’s inauguration.
The only sub-sector which lost last month was Merger Arbitrage -0.19%. The strategy is tipped to do well this year as a result of regulatory changes in the US – perhaps this is a buying opportunity. Dan Loeb of Third Point certainly hopes Trump’s planned mix of tax cuts, reduced regulation and infrastructure spending will help. “This environment is undoubtedly better for active investing – just as active investing was considered to be on its deathbed,” Loeb wrote in a letter to clients “A shift from government monetary stimulus to measures that will increase personal and corporate spending will create lower correlations between various types of securities and greater dispersion of results within them, such as stocks,” Loeb said.
Man Group CEO Luke Ellis also sees improved hedge fund performance as correlations between markets start to diverge. Man Group has seen six straight quarters of asset inflows, bucking the general trend of the past year. Warren Lichtenstein’s Steel Partners, is also optimistic. They raised $500mln for a new fund – their first capital raising in 25 years – to buy stakes in underperforming companies.
Global Macro managed +0.01% which was creditable considering the performance of its comparator, Managed Futures. Perhaps this relates to the record long exposure in oil post the OPEC deal. According to the commitment of traders report from the CFTC, speculative oil futures spread positions increased dramatically, in expectation of a continued flattening of the contango in the forward market. Copper also saw price increases on hopes of increased Chinese demand.
The Barclayhedge CTA Index recorded -0.53% for January. Agricultural Traders (often reliant upon discretionary strategies and operating in less correlated markets) were the exception to the negative trend across the sector +0.14%. For Diversified (-1.00%) and Systematic (-0.72%) conditions proved demanding. Interestingly Currency Traders parred losses to -0.11% despite the significant reversal in the US$. Precious metals also so reversals. These two asset classes were responsible for the majority of the negative performance during the month.
In terms of new launches and institutional allocations, a clear trend has been visible for some while. This is towards strategies which are difficult to replicate. Direct lending is one area, distressed securities is another. Most of these strategies are also ones which offer attractive yields, which appeals to institutions with annual return targets of 7.5% to 8%.
Another trend which has been evident is the response of off-shore hedge funds to EU regulation. This is of course especially relevant to UK based managers in anticipation of the post-Brexit environment. Prequin data suggests that most hedge funds market to only to one or two countries within the EU. Under AIFMD the National Private Placement Regime may represent the most cost effective method of access, at least for the next year or so.
Globally, only 20% of investment in hedge funds is from European investors, of which half is from the UK and Switzerland. It may well be that, like Australian investors, wanting access off-shore managers, those committed to alternative investments will create the vehicles to which off-shore funds may market.
For the smaller hedge fund, the cost of gaining access to the EU investor base may not prove worthwhile. In general, only the largest and most sophisticated institutional investors are likely to consider smaller hedge fund managers. Each hedge fund manager should assess the marketing and
distribution challenge of Europe, along with other geographic locations, on a case by case basis. Linear Investments are specialist in this area, we would be delighted to assist you in this area.
For those who esteem the European investor, UCITs vehicles are an obvious route to market, but the high liquidity constraints of UCITs make them a challenge for many managers. Marshall Wace Liquid Alpha, a market neutral equity strategy, has been a notable success, but since the end of January they have limited in-flows to $50,000 per subscription in order to maintain returns – caveat emptor. Elsewhere onshore products continue to gain traction, with quantitative managers Systematica and Two Sigma both seeing inflows on Schroder’s $12.9bln UCITs platform.
Event Driven has been a top performing strategy for the last year, but events are happening within the hedge fund management sector too. Softbank of Japan announced the purchase of Fortress Investment Group for $3.3bln.
Within the Fund of Fund space mergers have been a feature for several years, however the announcement that KKR Prisma and Paamco are to merge, forming a $30bn FoHF giant, remains noteworthy.
And finally, whilst managed futures suffered poor performance last year, according to Prequin, Swiss Capital Alternative Investments announced that it will invest between $1bln and $2bln in up to 25 managed futures and global macro managers in the coming year. The old adage “buy trend-followers on a draw-down” still appears to have some serious advocates.
You can catch Colin Lloyd’s roundups on Linear Talk every fortnight. Click on the Media tab to watch interviews with interesting characters from across the hedge fund community or read more articles on the latest trends and performance.