By – Colin Lloyd
October was a mixed month for hedge funds and challenging once again for managed futures. The table below, from BarclayHedge, ranks the sub-indices by monthly performance:-
| Index | October | No of funds | YTD |
| Barclay Hedge Fund Index | -0.29% | 1903 | 4.07% |
| Distressed Securities Index | 2.50% | 28 | 11.11% |
| Emerging Markets Index | 0.96% | 267 | 11.94% |
| Pacific Rim Equities Index | 0.45% | 22 | -0.94% |
| Equity Market Neutral Index | 0.42% | 70 | -0.33% |
| Fixed Income Arbitrage Index | 0.34% | 29 | 3.03% |
| Global Macro Index | 0.18% | 111 | -1.23% |
| Convertible Arbitrage Index | 0.17% | 16 | 4.23% |
| Event Driven Index | -0.36% | 83 | 8.24% |
| Merger Arbitrage Index | -0.42% | 34 | 3.91% |
| Multi Strategy Index | -0.60% | 73 | 3.01% |
| Equity Long/Short Index | -0.63% | 304 | 0.09% |
| European Equities Index | -0.71% | 87 | -5.61% |
| Equity Long Bias Index | -1.13% | 248 | 0.74% |
| Technology Index | -1.20% | 22 | 3.86% |
| Healthcare & Biotechnology Index
|
-5.95% | 24 | -5.31% |
| Index | October | % of funds | YTD |
| Barclay CTA Index | -1.03% | 80.65% | -1.05% |
| Currency Traders Index | 0.68% | 75.00% | 0.97% |
| Discretionary Traders Index | 0.24% | 83.16% | -1.59% |
| Agricultural Traders Index | -0.56% | 77.78% | -1.93% |
| Fin./Met. Traders Index | -0.91% | 88.89% | 0.97% |
| Systematic Traders Index | -1.37% | 79.17% | -1.34% |
| Diversified Traders Index | -1.58% | 78.39% | -2.34% |
Source: BarclayHedge
Hedge Funds
The BarclayHedge Hedge Fund Index was down -0.29% in October; YTD it remains just above +4%. The top performing sub-Index was Distressed Securities +2.5%, extending its YTD gains to +11.11%. Given the sell-off in bonds during the month this is quite a surprise but it may relate to the performance of the energy sector. Crude oil made new highs for the year on 10th October. This puts Distressed in second place for the year, just behind Emerging Markets, which were the next best performer last month at +0.94% (YTD +11.94%). Managers who specialise in Latin America have had particularly strong returns during 2016. The Event Driven Index, which has been a strong performer this year, marked time last month (October -0.36%, YTD +8.24%) as managers squared their exposures ahead of the US Election. The squaring of positions was a feature in most sectors, since the outcome of the US election has proved too close to call.
The worst performing sub-sector was Healthcare and Biotechnology (-5.95%). After a +5.39% return last month, markets reversed at the beginning of October. This remains among the most volatile equity sectors, therefore, the swings in this sub-index are unsurprising.
The worst performing sub-index YTD remains European Equity. Emerging markets have had a recovery from depressed levels this year and the US economy is showing some signs of a more broad-based recovery but Europe is caught “betwixt the twain”.
Managed Futures
The BarclayHedge CTA Index was down -1.03% in October, bringing the YTD performance to -1.05%. Currency Traders were the best performers (+0.68%) helped by the sharp decline in Sterling resulting from the “Fin Tech Flash Crash” early in the month. This was insufficient to help the Systematic (Oct -1.37%, YTD -1.34%) or Diversified Index (Oct -1.58%, YTD -2.34%) both of which suffered from rising bond yields, reversals in the bullish trend of crude oil and a collapse and subsequent rebound in gold.
Assets Under Management
The table below shows the assets under management for hedge funds and managed futures during the last three quarters:-
| Assets Under Management | 3rd Qtr 2016 | 2nd Qtr 2016 | 1st Qtr 2016 |
| Hedge Funds | $2981.2B | $2936.2B | $2861.7B |
| Funds of Funds | $383.0B | $367.3B | $399.5B |
| Convertible Arbitrage | $24.3B | $22.2B | $22.4B |
| Distressed Securities | $102.3B | $105.7B | $117.2B |
| Emerging Markets | $254.4B | $232.4B | $238.4B |
| Equity Long Bias | $226.7B | $219.5B | $222.2B |
| Equity Long/Short | $245.4B | $237.7B | $214.4B |
| Equity Long-Only | $136.1B | $130.4B | $135.6B |
| Equity Market Neutral | $84.6B | $82.0B | $73.5B |
| Event Driven | $155.2B | $198.5B | $222.2B |
| Fixed Income | $564.4B | $563.5B | $529.0B |
| Macro | $229.5B | $243.6B | $252.7B |
| Merger Arbitrage | $67.1B | $63.7B | $33.4B |
| Multi-Strategy | $360.2B | $354.0B | $319.7B |
| Other | $149.2B | $132.0B | $94.0B |
| Sector Specific | $134.9B | $145.7B | $137.6B |
| Managed Futures | $342.3B | $333.7B | $333.9B |
| Agricultural Traders | $1.8B | $1.8B | $1.6B |
| Currency Traders | $19.5B | $19.0B | $19.6B |
| Diversified Traders | $203.6B | $207.2B | $198.0B |
Source: BarclayHedge
There are a number of interesting observations from this data. Firstly, rumours of the death of the hedge fund business appear to be grossly exaggerated.
Hedge fund assets have risen steady during the year from $2.86trln (Q1) to $2.98trln (Q3) +4.18%. Despite continuous reports of redemptions, fund performance has encouraged about the same value of new subscriptions.
Managed futures assets, whilst dipping fractionally during Q2 are now above the levels of Q1 at $342bln.
Even Hedge Fund of Funds have seen inflows during Q3 ($383bln) – the first rise in several quarters, through far below the $562bln of 2010.
Among other observations: the steady decline in AUM allocated to this year’s top performing sector, Distressed Securities seems ironic. The increased allocation to Emerging Markets after the sharp rebound in performance after January and February, is more explicable. Another puzzle is the divergence between Event Driven AUM (-30%) and Merger Arbitrage (+101%). Event Driven performance (+8.24%) has been more than twice that of Merger Arbitrage (+3.91%). Reports about the challenging environment for Multi-Strategy funds is not borne out by the data. AUM has risen by 13%.
Within Managed Futures, Systematic and Diversified Traders have garnered new assets despite poor performance YTD (AUM +5.4% and +2.8% respectively). It is tempting to ascribe this to canny allocators buying weakness but it is more likely a reflection of the erratic and volatile nature of these sectors during 2016. Despite many scholarly articles advising investors to buy weakness, allocation flows follow performance.
Industry Trends
Increasing interest in application of quantitative methods to hedge fund management was evident again last month, with Man AHL Oxon announcing that it had opened a quant incubator platform during the summer. Meanwhile, Paris based, CFM has launched a low-fee UCITs quant product, whilst Aspect Capital (CTA) joined Graham Capital Management (Global Macro) and Esmo Asset Management (Emerging Markets) to manage a macro SICAV for Franklin Templeton.
Quant funds, such as Academia Capital Management, are also emerging in Asia as the liquidity characteristics of Asian markets becomes more orderly. A further sign of the enthusiasm investors are showing for the quantitative space is seen in reports that, Leda Braga’s, Systematica, despite poor performance has seen steady asset inflows throughout the year.
The reports of institutional redemptions from hedge funds continues. CalPERS started the trend back in September 2014 – leaving the sector altogether. NYCERS exited in April of this year and Oklahoma Firefighters Pension & Retirement System followed their lead, but these are the only complete exits from the sector by public pension funds in the US.
In February the Illinois State Board of Investment reduced their exposure from 10% to 3% and Orange County ERS, which, among others, has been reviewing their hedge fund investment strategy since the summer, put Michael Hintze’s, CQS, on watch last month. Meanwhile the City of Cambridge Retirement System, which invests in hedge funds via the $63bln Massachusetts Pension Reserves Investment Trust (PRIT) is considering closing its hedge fund programme. PRIT has $5.58bln (8.8%) allocated to hedge funds. So, whilst the City of Cambridge redemption ($90mln) is insignificant, its influence on boards of other PRIT managed schemes maybe much greater.
A more considered approach has been taken by the Kentucky Retirement Systems. Although they plan to cut half their allocation, they have stated that they will consider maintaining some exposure to hedge funds, at a lower cost, through managed accounts.
The principal reason for pension fund redemptions is poor performance. Many of these funds have 7.5% to 8% annual return targets – hedge funds are simply failing to deliver the requisite returns, regardless of their attractive Sharpe ratios.
You can catch Colin’s roundups every fortnight on Linear Talk – released on our website, YouTube Channel, and LinkedIn. Download the PDF version of Colin’s roundup here.
