By Colin Lloyd
February was another positive month for hedge fund performance and saw Managed Futures reverse the majority of losses seen during January.
Hedge Funds
The Barclayhedge Hedge Fund Index gained 1.03% in February, 2.42% YTD. The Technology and Healthcare & Biotech Indices were almost neck and neck in first place +2.59% and 2.57% respectively. Emerging Markets also managed a creditable +1.74% – HFR reported that the sectors AUM hit an all-time record of $200bln last month, with flows heading specifically for Russia, Eastern Europe and Latin America.
The strength of equity markets globally helped Long Biased managers which were up 1.60%. In fact every sub-sector achieved positive returns on the month. Even Fixed Income Arbitrage returned 1.25% from broadly sideways markets, although the sharp movements in European government
bond spreads, driven by political uncertainty, undoubtedly helped.
Interestingly, Equity Long/Short and Equity Market Neutral brought up the rear with returns of +0.49% and +0.11%. With equity market volatility near to five year lows, diversified hedged opportunities are more limited. FIS reported, however, that short positions in the Dow (DJIA) jumped 13% in the 30 days to 20th February, while shorts in EuroSTOXX 600 rose 18% over the same period. According to the Wall Street Journal, Corporate Insider buying of their own company’s stock hit its lowest level in 29 years. Hedged strategies may yet have their time in the limelight later this year.
Managed Futures
The performance drivers for managed futures included, the renewed rebound of the US$, which had witnessed weakness during January, and the ever rising stock market. Copper, which had performed well the previous month, marked time and Interest rate markets were broadly unchanged after the
January correction to their bear trend of last year.
The Barclayhedge CTA Index was up 0.72% on the month, down 0.01% YTD. Financial and Metals Traders, several of whom use fundamental techniques, performed best +1.18% for the month, +0.85% YTD. Systematic and Diversified Traders also did well. Only Agricultural Traders were down and then only by a mere 0.08%.
Trades
Aside from the macro trades mentioned above, there have been flows into Gold, Silver and Crude Oil, although the latter has met with substantial trade selling, as drilling productivity gains start to lower break-evens for an increasing number of US oil producers.
In equities, Stan Druckenmiller’s Duquesne Capital has been acquiring US small caps – which have been outperforming. David Tepper’s Appaloosa continues to hold long equity and short bond exposure. Meanwhile, GAM, the Hedge Fund of Fund manager, is recommending allocations to Convertible Arbitrage managers after their recent resurgence.
Industry Trends
Deutsche Bank’s 15th Alternative Investment Survey was released at the end of February. It was, as ever, a curate’s egg. Of the 460 institutional investors who responded – down from more than 500 last year – 75% intend to grow or maintain their exposure to hedge funds in 2017. The most popular strategy for a potential allocation is Global Macro (27%) followed by Alternative Beta (26%) up from 20% in 2016. Average fees paid by institutions were lower than last year – management fees were said to have averaged 1.59% vs 1.63% and performance fees were 17.69% vs 17.85%.
The downward pressure on fees appears to be broad-based. Winton Capital, which broke the mould in the 1997, launching with a fee structure of 1%/20%, has just cut its fees to 0.9%/16%. In the macro space Tudor, which cut fees just eight months ago, has reduced its terms once more, to
1.75%/20%. Of new hedge fund launches, 75% now adopt non-standard fee structures. 2% and 20% may always have been an aspiration rather than a reality for most hedge fund managers, now it has become positively apocryphal.
It’s not all doom and gloom, however. Blackstone has raised $1.5bln for its third Strategic Alliance Fund, which will provide seed capital for new hedge fund managers. The firm’s second fund garnered $2.4bln in 2011. Elsewhere, assets continue to flow into the industry. Schroders UCITs platform has been a victim of its own success, announcing that the Two Sigma Gaia Fund is now closed to new subscriptions.
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