Colin Lloyd – featured on Linear Talk
Colin Lloyd is the author of macroeconomic investment letter service ‘In the Long Run‘. Serving as Linear Talk’s co-presenter along with Linear’s Chairman, Jerry Lees, Colin regularly reviews the markets, hedge fund performance, and prevalent macro events in his macro roundup.
Hedge Fund Performance, Trades and Industry Trends – July 2016
The volatility of hedge fund returns continued during July, although the wild gyrations of June were not repeated. The table below from Barclayhedge is arranged by YTD returns for Hedge Funds and then for Managed Futures (CTAs):-
|Index||July||No. Funds reporting||YTD|
|Barclay Hedge Fund Index||1.90%||1619||2.58%|
|Emerging Markets Index||2.64%||182||6.83%|
|Event Driven Index||2.14%||66||6.35%|
|Distressed Securities Index||3.75%||24||6.31%|
|Equity Short Bias Index||-2.58%||1||3.79%|
|Convertible Arbitrage Index||1.53%||9||2.80%|
|Merger Arbitrage Index||0.18%||32||2.76%|
|Multi Strategy Index||1.35%||46||2.54%|
|Fixed Income Arbitrage Index||0.94%||31||1.47%|
|Equity Long Bias Index||2.98%||215||0.22%|
|Global Macro Index||0.68%||108||0.03%|
|Equity Long/Short Index||1.68%||276||-0.34%|
|Equity Market Neutral Index||0.67%||60||-0.74%|
|Fund of Funds Index||1.25%||238||-2.03%|
|Pacific Rim Equities Index||1.45%||17||-2.54%|
|Healthcare & Biotechnology Index||4.00%||28||-4.98%|
|European Equities Index||1.41%||67||-6.12%|
|July||% of funds reporting||YTD|
|Barclay CTA Index||0.33%||77.27%||2.08%|
|Fin./Met. Traders Index||0.37%||75.32%||3.23%|
|Diversified Traders Index||0.66%||76.78%||2.88%|
|Systematic Traders Index||0.45%||75.98%||2.73%|
|Currency Traders Index||-0.62%||67.27%||1.55%|
|Discretionary Traders Index||-0.37%||73.00%||-1.20%|
|Agricultural Traders Index||-0.44%||68.97%||-1.21%|
Among the hedge fund strategies, Healthcare and Biotech (+4%) was the top performing sector, yet remains down by nearly 5% on the year. Distressed Securities (+3.75%) Emerging Markets (+2.64%) and Event Driven (+2.14%) performed strongly and have all returned more than 6% YTD. Apart from Equity Short Bias (only one fund reporting) all hedge fund sub-Indices produced positive returns as the heightened volatility of June subsided. Equity and credit markets regained composure, exemplified by CB Arb which delivered 1.53%. Despite the lower trading activity associated with the summer months, a “risk-on” appetite emerged, for example, Lansdowne Partners are reported to have bought numerous UK stocks which they believe are undervalued post-Referendum.
CTAs also managed to deliver positive returns, although Currency Traders (-0.62%) dogged by trend reversals, continued to give back the gains they made earlier in the year. Agricultural Traders (-0.44%) markets saw reversals although silver and interest rates delivered favourable returns for Diversified (+0.66%) and Systematic (+0.45%) managers.
The markets were generally benign during July. Global stocks made 11 month highs and government bonds plumbed new all-time low yields. The US$ staged a reversal after the “safe-haven” flows seen in the aftermath of Brexit, although, towards month end, Sterling came under renewed pressure ahead of the “pre-announced” BoE rate cut – which then materialised at the beginning of August. By contrast, Currency traders were caught off-guard by the RBA, who cut rates unexpectedly on 2nd August.
Other notable trades included, a build-up of short positions in Crude Oil as the US active rig count rose and production increased. Gold marked time in July but Silver continued to build on gains seen in June, this helped both CTAs and hedge funds specialising in the precious metals sector. There has been a significant reduction in long exposure to commodities elsewhere, particularly in the agricultural space. Natural Gas, as is often the case, has been an outlier, witnessing new longs towards month end. The improved performance of emerging markets has led to increased capital allocations, with several funds adjusting their exposure in favour of China in expectation of an end to the slowdown in economic growth.
In stock specific news, Elliot Associates has been vocal in their criticism of the AB Inbev $71bln takeover of SAB Miller and several hedge funds were wrong footed by Softbank’s bid for ARM which saw the latter’s stock price rise by 50%.
Last month saw the release of two, conflicting, hedge fund industry reports, making it difficult to assess the health of the sector. eVestment reported that Hedge Fund outflows for June were $20.7bln, marking the third straight quarter of redemptions. They go on to report that Asian Hedge Funds suffered the worst H1 decline in assets in five years – down $6.3bln to $54.9bln.
EurekaHedge, by contrast, reported a $19.9bln increase in industry AUM for H1 2016 – despite $5.2bln of trading losses. Of the $25.1bln, $7.2bln was allocated to systematic strategies which have shown a positive return YTD. On a less positive note, they go on to report the sixth quarter of contraction in the European Hedge Fund industry. In Q2 2016 there were 62 fund closures versus 54 launches. Closures since the beginning of 2015 totalled 484 against 415 launches.
The New Jersey Investment Council, which manages the state’s pension fund, announced a reduction in its hedge fund exposure from 12.5% to 6%, citing high fees and poor returns as reasons for their decision.
Other indications of the challenging nature of the current business environment can be seen in news that Deutsche Bank’s Equity Unit saw a 31% decline in revenues in Q2, largely as a result of lower trading volumes and reduced financing balances from its hedge fund clientele.
Man Group, bucked the trend of, what they called, “a challenging environment”, with a net inflow of $1bln for H1 – with subscriptions destined for their systematic strategies. The departure of their CEO, Manny Roman – who will assume the helm of PIMCO – took some of the shine off these results.
This year’s strong showing by systematic managers has heralded a continued investment by, ostensibly, more traditional hedge funds into the “Quant” space. Tudor Investments is reported to have joined the fray, announcing additional senior “scientific” hires. Balyasny Asset Management have also added to their systematic teams as the importance of machine learning moves inexorably towards the heart of the investment process.
You can download the full PDF of Colin’s roundup here