Hedge Fund Performance and Industry Trends – March 2017

By Colin Lloyd 

March was another positive month for hedge fund performance. Managed futures strategies, by contrast struggled once again.

Hedge Funds

Barclay Hedge Fund Indices March No. of funds YTD
Barclay Hedge Fund Index 0.46% 1857 2.91%
Technology Index 2.47% 27 7.10%
Healthcare & Biotechnology Index 1.97% 33 8.17%
European Equities Index 0.92% 57 2.86%
Emerging Markets Index 0.90% 208 5.55%
Pacific Rim Equities Index 0.72% 23 2.52%
Equity Long Bias Index 0.65% 255 3.39%
Equity Long/Short Index 0.58% 301 1.91%
Multi Strategy Index 0.56% 71 2.25%
Equity Market Neutral Index 0.52% 74 1.04%
Merger Arbitrage Index 0.52% 35 0.77%
Fund of Funds Index 0.49% 282 2.07%
Event Driven Index 0.31% 77 3.34%
Fixed Income Arbitrage Index 0.21% 19 2.49%
Global Macro Index 0.09% 118 1.06%
Convertible Arbitrage Index 0.02% 16 1.31%
Distressed Securities Index -1.34% 24 0.93%

Source: Barclayhedge

The BarclayHedge Hedge Fund Index gained 0.46% in March taking it to +2.91% YTD. The only sector which suffered from negative performance was distressed securities (-1.34%) and even that remains positive YTD (+0.93%). All the remaining sub-sectors delivered positive results with Technology (+2.47%, +7.1% YTD) and Healthcare and Biotech (+1.97%, +8.17% YTD) leading to march higher. Emerging markets also rose (+0.9%, +5.55% YTD) maintaining their third place position for the year.

 

InvestHedge reports that the AUM of their Billion Dollar Club of Hedge Fund of Funds, those with assets in excess of $1bln, fell 6% in 2016, so it is encouraging that the BarclayHedge, Fund of Funds Index has made some progress in the first quarter (+0.49%, +2.07% YTD) making amends for a negative performance in 2016.

 

Managed Futures

Barclay CTA Indices March % of funds YTD
Barclay CTA Index -0.40% 82.88% -0.71%
Agricultural Traders Index 0.62% 75.68% 0.79%
Currency Traders Index 0.41% 67.24% 0.40%
Fin./Met. Traders Index 0.37% 81.69% 1.04%
Discretionary Traders Index 0.31% 76.92% -0.13%
Systematic Traders Index -0.66% 82.13% -1.05%
Diversified Traders Index -1.08% 81.68% -2.16%

Source: Barclayhedge

 

Managed Futures, which, according to EurekaHedge saw inflows of $8.6bln in February, suffered another challenging month. The Barclayhedge CTA Index declined 0.40%, leaving in down 71 basis points for the year. The sectoral decline was led by Diversified Traders (-1.08%, -2.16% YTD) and Systematic Traders (-0.66, -1.05% YTD). The negative performance of US stocks was certainly a factor for the trend following managers as was the reversal in bond markets, which rallied in response to stock market weakness.

 

Financials and Metals Traders continued to buck the negative performance (+0.31%, +1.04% YTD) which is impressive considering the sideways nature of many of the major markets this year. Copper retreated from its high for the year, seen at the beginning of the month, but this was partially offset by Zinc which rebounded after weakness in February. Gold, meanwhile, staged a strong rebound from recent lows in response to weaker stocks.

 

Industry Trends

In a recent report, HFR revealed that the concentration of hedge fund assets among the largest firms continues. In 2008 firms with more than $2bln AUM accounted for 86% of assets, by 2016 this had risen to 91%. It is, therefore, encouraging to see AON Hewitt announcing plans to launch a managed account platform of 50 hedge fund managers with assets under $2bln. This product has been designed to give mid-size pension funds and institutional investors exposure to smaller hedge funds.

 

Credit Suisse have also been looking at investment opportunities within the hedge fund space recently. They launched Anteil Capital Partners to acquire equity stakes in hedge fund management companies. Their first fund has just closed having raised $300mln. It is expected to make its first

investment next month.

 

Other notable new launches include Leda Braga’s Systematica who have introduced an Alternative Risk Premia Fund and Brevan Howard, which just raised $700mln for a new fund managed exclusively by Alan Howard.

 

Ray Dalio’s Pure Alpha II bucked the trend of most Macro Funds in Q1, returning 2.3%. Martin Hughes, Tosca Fund also had a stellar rebound during the quarter, rising 7.8%, entirely reversing the 7.5% loss it sustained during 2016.

 

In other news, the IPM, Systematic Macro UCITs programme, has now reached $1bln AUM – another sign of the increasing demand for UCITs products. One high profile casualty has been Eric Mindich’s, Eton Park which returned money to investors after a difficult period of performance in 2016. Paul Singer’s, Elliott Associates, however, reopened their flagship fund to new investment.

 

You can download the PDF of the article Here

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. 

Hedge Fund Performance, Trades and Industry Trends – February 2017

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.

 

You can download the PDF of the Article HERE

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. 

Macro Roundup – March I

By Colin Lloyd 

The Trump correction of January appears to have run its course. This is evident in the rebound of the US$ Index. US stocks remain ascendant, reaching all-time highs at month end. US bond markets, meanwhile, remain range-bound, reluctant to give up the yield increases seen since the November election. In Germany, Bund yields declined.

Currencies

The US$ Index hit its lowest level since the November election on 2nd at 99.19, only to recover. By the 15th it had tested its high at 101.75.

EURUSD followed a similar pattern of consolidation after testing a high of 1.0829 on 2nd – not far from the December high of 1.0873. It closed the month near its low at 1.0577.

USDJPY remained strong despite the EURUSD decline. During the month it traded in a narrow 3.5 point range, closing almost unchanged at 112.78.

USDCNH also consolidated after testing its low at 6.7916 on 3rd. The Chinese devaluation has fed through to the Chinese economy over the last few months. Official intervention is likely to keep the currency locked into a narrow range, at least, until the Autumn.

Stocks

The US stock market continues to benefit from the pro-business combination of Trump in the White House and the GOP in control of Congress and the Senate. The S&P 500 Index traded to new highs, closing the month at 2,362.75 off a high of 2,370.75 on the pen-ultimate day of trading. The VIX Index (a measure of the volatility of the S&P) is, unsurprisingly, at the lower end of its five year range at 12.2%. It makes sense to be cautious in this environment, the S&P index is up nearly 13% from its

pre-election lows. Option strategies may offer good value at these levels.

The Nikkei 225 remains range-bound. PM Abe’s meeting with the US President was supportive. From a technical perspective the market needs to close above 20,950 in order to have broken-out. The index traded in a 3.7% range last month, closing at 19,119.

The EuroStoxx 50 looks more constructive from a technical perspective. It broke out of its recent range to the upside making a high at 3,355 on 22nd and closing near this level at 3,320. Election fever will dictate the next few months, beginning with the Netherlands on 15th March, followed by France on the 7th May and culminating in German elections on 24th September. The index may have broken out, but it’s difficult to imagine it surging ahead with so much political uncertainty hanging over the markets.

Bonds

US 10yr bonds, which have seen a substantial increase in yields since November, stabilised and then turned lower over the last few weeks. February was a month of consolidation. The highest yield was seen on 15th at 2.47%, by 24th it had fallen to 2.31%. It closed the month at 2.42%. This is still 90bps above pre-election levels and the prospect of a further rate increase from the Federal Reserve may see yields rise again soon.

German 10yr bunds marched to a different tune. After opening the month by testing their highs at 0.48% they had plunged to 0.18% by 24th, closing at 0.21%. Domestic politics will dominate European bond markets until the German elections in September. For the moment, fears about higher yielding Italian BTPs seem to have subsided. The spread between 10yr BTPs and Bonos, which we discussed last month, narrowed from 66bp to 37bp. This might just be that buying opportunity. Picking up Bonos at 37bp over Italy does not encumber one with a great deal of negative carry. The spread may narrow further, so average in.

10yr Gilts rallied throughout the month. From an opening at 1.47%, yields declined, to test 1.07% on 24th. These yields are the lowest since October and have seen a full retracement of the Trump related yield increase. 10yr JGBs remain trapped in a policy induced coma, although a spike to 0.155% was seen in the morning session on the 3rd. They then followed the lead of Germany and the UK, closing on their lows at 0.05%.

Commodities

Gold ended February just off its highs at $1,253/oz. The previous day’s high of $1,263/oz has reversed the majority of the Trump related decline witnessed since November.

Copper enjoyed another firm start to the month. It traded $2,82/lb on 13th and ended the month at $2.70/lb, holding on to four months of price increases. Signs of stronger demand from China keeps a bid under the market.

The oil market also performed well, with WTI reaching $54.94/bbl on 23rd, however the Baker Hughes Rig Count continues to rise in response – up 36 since 27th January to reach 602 on 24th February. Further upside in oil prices may be achievable but price momentum begins to slacken, barring a significant increase in demand, it is unlikely prices will get much above $60/bbl.

Download the PDF of the Article here

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. 

Hedge Fund Performance, Trades and Industry Trends – February I

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
Technology Index 2.79% 37
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%

Source: BarclayHedge

 

Hedge Funds
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.

 

Managed Futures
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.

 

Industry Trends
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. 

Outsourcing Trading: a solution in a challenging environment

Being an asset manager in today’s market can be a bruising experience. Margins are shrinking, fees are under pressure, while operating costs have grown out of proportion. This is happening in tandem with unpredictable markets, making alpha creation for clients exceptionally difficult. Cost saving opportunities have to be identified wherever possible in a way that does not compromise the integrity and success of the business.  Linear Outsourced Trading has sponsored this paper to look at some of the trends which are pushing asset managers towards outsourcing their trading desks to third parties.

 

The Cost Burden

 

It is no secret that active asset management returns have not been in line with investor expectations.    In a forceful indictment, the UK Financial Conduct Authority’s (FCA) Asset Management Market Study Interim Report stated that active asset managers routinely underperformed their benchmarks after fees. It also questioned why the industry’s fees had not fallen as competition proliferated, something which has occurred in the passive fund sector, where there has been a race to the bottom on investor charges. All of this has contributed to the enormous growth in lower margin passive products, which, despite a fivefold increase in the UK since 2005, are still expected to gain market share.

 

The FCA’s comments will naturally embolden investors to apply leverage on their active management fees. Such pressure will cause some firms to rethink their internal operational structures, and look for cost savings. The gravity of the situation facing asset managers is severe. According to a poll conducted by Financial News of leading asset management firms, 74% of Chief Investment Officers (CIOs) expected fees to fall in 2017. None expected fees to rise. In another study, Casey Quirk (part of Deloitte) forecasts that asset managers’ median profit margins will fall nearly 18% from 34% to 28% by 2021.

 

The industry should be worried, as its very foundation is seemingly under threat from spiralling costs. So what major cost overheads can be scaled down? Traders do not come cheaply. The fully loaded cost of a typical trader with experience has been independently estimated at £300,000, meaning even the cost of a small team could be close to £1 million.  This is an overhead many managers could do without. Outsourcing a trading desk to a trusted third party could save hundreds of thousands of pounds, allowing firms to invest elsewhere in their business.

 

 

The Race to Comply with Regulation

 

Regulation is a very significant cost for fund managers. Following the financial crisis, regulation has eaten into fund managers’ margins, forcing them to make additional hires particularly around legal and compliance, and upgrade their technology and systems. The Markets in Financial Instruments Directive II (MiFID II) will be law in less than 12 months, and it is a deadline fund managers need to be working towards urgently. Non-compliance is not an option.

 

MiFID II covers a number of issue areas, but none are more important than its rules around unbundling. Research from sell-side brokers is typically paid for in equity commissions from managers, but this EU regulation will mean that the payment for research and execution services must be separate.

 

A study of more than 200 predominantly European asset managers by RSRCHXchange, a research firm, found a third of respondents had little idea of when they would be compliant with the rules, although half anticipated to be ready around summer.

 

50% of the firms in the survey are still uncertain about how to pay for research. The current environment and outlook means most buy-side firms are reluctant to incur the costs of research themselves but some are taking the moral high ground. RSRCHX said 19% of asset managers intended on paying for research from their own P&L, putting further pressure on margins, while 9% suggested they were in favour of passing on the cost to their clients – not an easy task when there is so much pressure on fees.

 

The consumption of research has been falling as firms have been forced to set monetary budgets and this reduction looks set to continue. RSRCHX analysis said 54% of the biggest firms expected their research spend to drop once the rules kick in. This is supported by a Financial News poll which found that 36% of CIOs from 23 firms managing more than £7 trillion will cut back on bank research. However, asset management firms are highly reliant on external research and there is likely to be a point where investment performance may suffer if the research spend is cut too severely. If asset managers decide to pay for research themselves – either externally or internally produced – they may have to assess whether having sufficient research or an in-house trading capability is more valuable.

 

Demonstrating to regulators that research and execution are divorced from each other is now a priority for asset managers particularly where individuals perform both functions.  The associated reporting this will entail is also a huge cost for smaller managers. Some buy-side firms increasingly recognise that physically extricating trading desks and outsourcing such activities to a credible third party is a logical approach to take if they want to highlight to regulators that execution and research are unbundled.

 

Why are asset managers beginning to consider outsourcing trading?

 

In the past, portfolio managers have been reluctant to embrace outsourced trading primarily because sell-side research was interlinked with trade execution. Other concerns included potential information leakage and loss of control. So what has changed?

 

Beginning January 2018, research payments must be separate from trade execution commissions. Portfolio managers’ historical concerns that removing the trade execution from the research provider would affect the quality or quantity of research are becoming irrelevant. Client confidentiality and market abuse monitoring are regulatory obligations and any risk of information leakage is further reduced if there is no incentive to pass on information.

 

Trading desks are increasingly seen as a cost at a time when overheads are being closely scrutinised. Cost pressure on the sell-side initially encouraged the growth in electronic trading and the same pressures, together with changes in market structure, has encouraged the buy-side to follow a similar path.

 

As a result, trading has become highly commoditised and many trading desks are not adding the value they previously provided. It is understandable that managers like to be collocated with trading but it is a luxury that they can ill afford and one that can be replicated in a far more efficient structure.

 

Outsourced trading is likely to become common practice. Compliance was once seen as a function that had to be internalised by managers, but attitudes have changed. A similar mind-set towards dealing desks among investors and CFOs/COOs is clearly visible. Economic reality and not sentimentality about old trading methods is likely to drive strategy.

 

 

With expertise across all market sectors and asset classes, Linear’s trading team will work with you to understand your key objectives and help improve your execution quality. This service helps separate Portfolio Management from Trading and offers dealing cover as required. Linear can also offer outsourced Middle and Back Office Management which is supported by the latest technology.

Linear Outsourced Trading has made a number of hires to boost its offering.  These include the appointments of Felix Mason, a former managing director at BlackRock and head of its London equity trading desk, and Paul Walker-Duncalf, former global head of equity trading at BlackRock, who arrived at Linear in mid-2016 as co-managing partner. Both hires work alongside Richard Lilley, co-managing partner at Linear Outsourced Trading.

If you would like to speak to Linear about its outsourced trading offering, please contact Paul Walker-Duncalf, Richard Lilley or Felix Mason on +44(0)20 3603 9827, or email info@linearinvestment.com

Hedge Fund Winners & Losers in 2016

Hedge Fund Performance; A year in review – 2016 


By Colin Lloyd 

As we end 2016 I want to take the opportunity to look back over the past 12 months, but first I quick up-date on December’s performance:-

  December No. of Funds YTD
Barclay Hedge Fund Index 1.22% 2104 6.20%
Global Macro Index 1.99% 128 1.80%
European Equities Index 1.90% 82 -4.29%
Distressed Securities Index 1.76% 36 14.28%
Event Driven Index 1.67% 84 11.28%
Equity Long Bias Index 1.54% 276 5.26%
Fixed Income Arbitrage Index 1.40% 32 5.50%
Multi Strategy Index 1.00% 78 4.72%
Convertible Arbitrage Index 0.98% 12 5.32%
Equity Long/Short Index 0.94% 324 1.91%
Fund of Funds Index 0.93% 387 -0.44%
Merger Arbitrage Index 0.83% 37 6.08%
Emerging Markets Index 0.77% 249 10.27%
Equity Market Neutral Index 0.49% 81 0.82%
Technology Index 0.36% 29 5.89%
Pacific Rim Equities Index 0.32% 26 0.18%
Healthcare & Biotechnology Index 0.31% 33 -2.75%

Source: Barclayhedge

There were positive returns across the board. Global Macro, which has had a challenging year, came out at the top +1.99%, helped by a stronger US$, lower T-Bonds and higher oil prices. European Equities finished the month +1.9% but remain the poorest performer YTD -4.29%. This year’s best performer, Distressed Securities, moved higher again last month +1.76% to finish 2016 +14.28%. Event Driven was close behind +1.67% for the month +11.28% YTD.

The Year in Review
Hedge Funds
The Barclayhedge Hedge Fund Index finished 2016 +6.2% which is the strongest performance since 2013. The chart below shows the performance of the index since 1997:-

barclayhedge_hedge_fund_index_1997-2016-002

Source: Barclayhedge

The combination of lower interest rates and the positive correlation between the Hedge Fund Index and long only stock indices, goes a long way to explaining the downward slope of this chart.
There are a couple of issues that I want to address, firstly, the small number of reporting funds at the beginning of the data set; this effect is likely to reduce the average return over time: and, secondly, “survivorship bias” which inflates the return of the index, since the reporting funds change over time, new entrants replacing those which fall by the wayside. These effects are to some degree off-setting.
2016 was, nonetheless, pleasing, this was the year in which many of the world’s bond markets followed the lead of Switzerland and plumbed the depth of negative yields. If low interest rates make it challenging for hedge funds to deliver returns then rising interest rates create an even more difficult environment. Since July government bond yields have been rising.
For a more granular analysis of hedge fund sub-sectors, Hedge Fund Research produce a wide range of indices, I have listed the top performing sub-sectors:-

HFR Indices 2016
Emerging Markets – Latin America 26.86%
Emerging Markets – Russia/Eastern Europe 25.86%
Relative Value – Yield Alternatives 18.17%
Equity Hedge – Energy/Basic Materials 17.90%
Event Driven – Distressed/Restructuring 14.34%
Event Driven – Special Situations 12.15%

Source: HFR

 

Within Emerging Markets, Latin America (+26.86%) and Russia/Eastern Europe (+25.86%) provided the most spectacular returns but given that the Brazilian, Bovespa Stock Index closed the year up 39% and the Russia, RTS Index was 56% higher by the year end, these returns are not entirely a surprise. Yield Alternatives, however, returned +18.17% which, given that it is a Relative Value strategy, is noteworthy.

 
Much of the commentary about hedge funds during 2016 concerned the poor returns offered by the sector over the last few years. A number of US Pension Funds have maintained annual return targets of 7.5/8% in order to meet their liabilities. Many are struggling with rising shortfalls, often due to an obsession with low volatility.

 
The CBOE Eurekahedge Long Volatility Hedge Fund Index finished 2016 with a volatility of 6.39% – slightly higher than the long run average. By comparison the CBOE Volatility Index, which measures the volatility of the S&P500, ended at 12.28%, which is below its long run average. The S&P500 Stock Index ended the year up 9.86% which, when adjusted to the same basis as the Long Volatility Hedge Fund Index, delivers a return of 5.13%. This is lower than the 6.2% return of the Barclayhedge Hedge Fund Index. Sadly this is unlikely to stop the constant call for lower fees from institutional investors.

 
Managed Futures
The effect of the fall in interest rates on declining annual performance shows even more clearly in the Barclayhedge CTA Index than in the Hedge Fund Index. The chart below goes back to the peak of interest rates in the early 1980s:-

barclayhedge_cta_index_1980-2016-002

Source: Barclayhedge 

 

2016 has been a difficult year for CTAs as the table below shows:-

  December % of Funds YTD
Barclay CTA Index 0.33% 85.84% -1.05%
Fin./Met. Traders Index 0.99% 85.71% 1.65%
Systematic Traders Index 0.44% 86.97% -1.48%
Diversified Traders Index 0.36% 87.79% -2.39%
Currency Traders Index 0.32% 81.25% 1.60%
Discretionary Traders Index 0.27% 80.85% -0.86%
Agricultural Traders Index -0.08% 73.08% -2.44%

Source: Barclayhedge 

 

During January and February the sector performed strongly with returns derived from shorts in JPY and longs in JGBs and European bond markets. By May many of these trends had reversed with A rising JPY and falling precious metals taking many managers into negative territory. June and July saw further positive performance with a rebound in precious metals and a general rise in major bond markets. From August onwards many of these trends reversed. By the eve of the US election in November exposures were reduced and performance was generally negative. Long US$ and Stock Index positions, together with long exposures in Copper helped the sector to claw back some of its losses by year end.

 
Currency Traders were the only sub-Sector to finish the year in positive territory, helped by the steady rise of the US$ throughout 2016. The Systematic and Diversified sectors, which attract the majority of assets, both suffered a second year of negative returns. In fact the Systematic Index has only delivered three years of positive returns in the last nine.

 
Assets Under Management and Fees
As with hedge fund performance, different data providers publish differing estimates on the size of the industry. The table below is from Barclayhedge:-

Sector AUM $blns

Q1 2016

AUM $blns

Q3 2016

Hedge Funds 2,862 2,981
Fund of Funds 400 383
Managed Futures 334 342

Source: Barclayhedge 

 

This indicates moderate growth, except in the Fund of Fund sector. HFR also indicate a rise, estimating total Hedge Fund AUM at a slightly more modest $2.97trln. EurekaHedge, by contrast calculate that total Hedge Fund AUM declined by $12.2bln – net redemptions totalled $42.5bln during 2016. Meanwhile eVestment calculate that total AUM increased by $13bln, but go on to state that total net redemptions amounted to $106bln.
The data providers may differ but overall this points to consolidation rather than collapse in the industry. Eurekahedge reveals that a net 44 hedge funds closed in 2016 – the first fall since 2000.

 
Preqin, another hedge fund data provider, estimate that in 2000, 52% of funds charged less than 2%, whilst in 2016 that figure has risen to 67%. Albourne Partners, which advises institutional investors with more than $400bln invested in hedge funds, reports that at least two dozen institutional style managers have adopted a “1-or-30” fee model since Q4. According to Alboune’s Jonathan Koerner, “The objective of 1-or-30 is to more consistently ensure that the investor retains 70 percent of alpha generated for its investment in a hedge fund.”

 
The Year Ahead
The geopolitical events of 2016 had a relatively muted impact on financial markets, 2017 may well be different. During the last century equity bull markets have lasted an average of 97 months. The current bull market began in March 2009. This is month 82, we may still have some way to go, however, since WWII only one bull market has lasted longer – 149 months between 1987 and 2000. I believe we are in the later stages of a bull market which has been driven, even more than usually, by accommodative monetary policy. Hedge Funds and, Managed Futures strategies – which have languished over the last couple of years – will prove their mettle in the year ahead.

 

 

You can catch Colin Lloyd’s roundups on Macro and Hedge Fund performance every fortnight on Linear Talk. Watch interviews with interesting characters from the hedge fund world on Linear Talk in the Media tab. Download Colin’s PDF here

 

Macro Roundup – January I

By Colin Lloyd

December marked the end of an extraordinary year for financial markets. Despite weakness during the latter half of 2016 for the major bond markets, JGBs, helped by the Bank of Japan’s (BoJ) “Yield Curve Control” policy, were among the best performers in absolute terms. The weakening of the GBP as a result of the Brexit vote was not far behind. For many markets, however, the combination of volatility and sharp reversals in trend made 2016 a zero sum game.

On the geo-political stage 2016 was tumultuous. Aside from the UK vote to leave the EU, there was a continued swing towards right-wing “nationalist” parties around Europe. The Syrian conflict, which has embroiled the West since 2011, provided an opportunity for Russia to demonstrate it military prowess. OPEC, after protracted negotiations agreed to reduce oil output – although Saudi Arabia has borne the brunt of production cuts. But, perhaps most importantly for the coming year, the US presidential elections caused a shift in financial markets around the world. We wait to see what a triumvirate of Republican dominance of Congress, Senate and the White House means for free trade and economic growth.

 

Currencies

The US$ Index continued to rise in the wake of the November election result, taking out the previous month’s 102.12 high to reach 103.62 on 20th.

The expectation of a US tax cut and fiscal spending improves the near-term prospects for the US economy: longer term the threat of protectionism may prove less sanguine but, should this lead to inflation, bond yields are likely to rise, making the US$ attractive from a carry perspective.
Whilst EURUSD remained range-bound during December, the USDJPY marched higher. Having closed November just off month highs at 114.47 it rallied a further four points to 118.63 on 15th. The next major technical resistance is at 125.86 – the high of June 2015. USDCNH also strengthened, taking out the November high to reach 6.9882 on 29th. Trump rhetoric about China can only be expected to increase, but , on a trade-weighted basis, the Chinese currency is broadly stable – this move is about USD strength rather than CNY weakness.
Bonds
The US bond market continues to decline with 10yr yields breaking above the November high of 2.43% to reach 2.64% on 15th of the month. As I mentioned in last month’s Macro Round-up, we now have an interesting technical pattern known as an “outside year reversal”. The Federal Reserve raised rates as expected but, with “reflation” in the air, further rate increases are anticipated during 2017. A stronger US$ may disappoint the interest rate bears making a steeper yield curve even more likely as expectations of rate increases will be reflected in longer maturities.
German Bunds, begrudgingly, followed the tone of the US bond market but the rise in yield was tempered by concerns surrounding Italy. Whilst BTP 10yr yields consolidated after PM Renzi lost his confidence vote, the 10 year yield spread with Germany remains elevated. It closed the month at 1.60%.
JGBs remained subdued – although they touched 0.09% on 16th they closed at 0.05%. The BoJ policy resolve, which entails keeping 10yr JGB yields at around zero, has yet to be tested by the markets. During the last two years the yield has vacillated between 0.55% in June 2015 and -029% in July 2016 – an 84bp range. It remains to be seen what tolerance the BoJ is prepared to permit. 2017 may well prove a challenging year for the Japanese bond market.
Stocks
The S&P500 continued to rally making new all-time highs at 2,277 on 13th. The strength of the US$ has less impact on US stocks than on other international equity markets since 70% of earnings are derived from the domestic economy.
The EuroStoxx50 Index followed the lead of the US market closing the year at 3,291 – its highest since December 2015. The next target is to retest the April 2015 high at 3,836. The weakness of the EURUSD is supportive – since the beginning of 2014 EURUSD has declined by 23.5% although throughout 2016 it has been range-bound.
From a technical perspective the Nikkei225 Index, which I discussed in November’s Macro Round-up, strengthened again last month, closing the year at 19,114, the highest since December 2015. The next target to breach is the June 2015 high at 20,950 which would imply a technical target of 27,035.
The chart below looks at the Nikkei225 Index since its all-time high in 1989. An official Central Bank policy which is tantamount to infinite QE is likely to undermine the JPY, this, in turn, will drive equity markets higher.

 

Commodities
Gold continued to decline in December testing the lowest levels since February at $1,124/oz on 15th – it has since rebounded but trading remains subdued. Copper, consolidated after rallying in November. Chinese demand remains uncertain since the recent recovery in the construction sector appears to have been a short term fiscal stimulus measure. Rebalancing towards domestic consumption remains the official economic policy of the Chinese administration.
Oil rallied after the OPEC deal, testing the highest levels since July 2015 at $54.51/bbl on 12th. So far these levels have been maintained into the New Year. The question for the energy markets is how quickly US producers can increase production to take advantage of these higher prices. The US Baker-Hughes Rig Count increased from 477 on 2nd to 525 on 30th December – the highest since December 2015: yet this is still far below the 1,609 high of October 2014.
Emerging Markets
There are two emerging market currencies which warrant comment. Firstly, USDMXN which strengthened again last month to close at 20.73 as the pre-election rhetoric of the US president-elect begins to appear less than rhetorical. The Mexican Peso has now fallen by 58% since the beginning of 2014. Once the new US administration has clarified its position in relation to Mexico there will be a buying opportunity for the Mexican currency, bonds and stocks.
The second market is USDTRY. The Turkish Lira weakened again last month after the Russian Ambassador to Turkey was assassinated. Since the beginning of 2013 the USDTRY has risen from 1.78 to 3.54 (+ 99%) Turkish exporters have a significant competitive advantage. If a Syrian peace deal be negotiated in 2017, the Lira together with Turkish stock and bond markets should perform strongly.

Macro Roundup – December I

Linear Talk – Macro Roundup –6th December 2016

By Colin LLoyd

November was dominated by the outcome of the US presidential election. It set the tone for currencies, stocks and bonds. Many of the predictions about a Trump win appear to have been wide of the mark. Time will tell, but, as the dust settled last month, markets began to digest the implications of his unconventional mix of economic policies.

The first policy impact will be that of a US tax cut. This should stimulate spending – the month-end second revision of US Q3 GDP (from 2.9% to 3.2%) merely abetted. Second will be the fiscal stimulus of infrastructure spending. The renegotiation of NAFTA and related protectionist measures will take much longer to feed through.

So how did this play out in the markets?

Currencies

The US$ Index tells the tale most clearly:-

macro-roundup_chart_dec-6th

Source: Barchart.com

 

The low of the month was seen in the initial aftermath of the election (95.91). By 24th it had reached 102.12, up 6.5% to the highest since March 2003. If the combination of a Republican Senate, Congress and President is perceived as capable of getting the job done we may be returning to the “strong dollar” era of 2000-2002 when the Index tested 120.

The two largest components of the US$ Index, EURUSD and USDJPY, unsurprisingly followed the tone. EURUSD tested 1.0515 on 24th, within 60 pips of the March 2015 low of 1.0456. The Japanese currency recorded its weakest reading since March testing USDJPY 114.56 at month-end.US policy may finally be proving a boon to Japanese PM Abe.

Even the “semi-pegged” Chinese currency could not keep pace with the “mighty dollar”, USDCNY reached 6.9661 on 24th – the weakest since June 2008.

Stocks

Despite a surging currency, the S&P500 wobbled momentarily then rallied to an all-time high of 2213.75 at month end. The US stock market drew comfort from the political hegemony of the GOP triumvirate. 70% of the earnings of the constituents of the S&P500 are domestic – a tax cut, infrastructure spending and the more distant prospect of protectionism is a heady cocktail, even for the most sober equity analyst.

 

Yen weakness and hope of preferment after Trump’s comments about China, helped Japanese stocks – for example:-

I’d love to have a trade war with China.

…If we did no business with China, frankly, we will save a lot of money.

Japan has a number of world class businesses and, unlike other markets where government bond prices could fall, the Bank of Japan has committed to maintain 10yr JGBs at around zero, making the dividend yield of the Japanese stock market (more than 2%) attractive. The Nikkei225 made a high of 18,483 on 25th, the highest since January. As I mentioned last month, from a technical perspective, the Nikkei looks constructive – a retest of the 21,000 level of June 2015 is the next stop, a convincing break above there takes into territory last travelled in the 1990’s.

 

European bourses were range-bound. They ignored the “sound of the Trumpet”, held back by the political uncertainty of populism, especially in Italy and Austria. Even the FTSE100, which had risen as Sterling declined, failed to hitch a ride on the American dream.

 

Bonds

 

Bond yields continued to rise last month, driven by US Treasuries. 10yr yields reached 2.42% on 23rd- they had spiked lower on Election day, touching 1.72%, but closed the month at 2.39%. These are the highest yields since July 2015. From a technical perspective, if they break above 2.50% before month and year end, we will have an “outside reversal” on the annual charts – a strong signal of a change in market direction. To elaborate, the 2015 range for 10yr yields was 2.5% to 1.64%. During 2016 the low (1.64%) was breached, with 10yr yields testing 1.32%. If the yield should rise above 2.5% before the end of December we will have seen a lower “low” and higher “high” than the previous year. This would be technically indicative of a “price failure” heralding a further, substantial rise in yields in 2017.

 

German 10yr Bunds followed the US in more muted fashion. They touched 0.40% on 14th – the highest yield since January, but the widening of the spread with Italian 10yr BTPs (which have also risen against Spanish Bonos) tempered their ascent. Bunds closed the month at 0.27% whilst BTPs reached 2.23% before prices recovered – they closed the month at 1.99% as traders’ squared positions ahead of the referendum on constitutional reform.

 

Gilt yields followed the US, with the 10yr rising to 1.50% on 18th – this is a tripling of yields since its lows in August. With increasing talk of a Hard Brexit, an autumn statement which set aside fiscal restraint and no sign of the government rushing to invoke article 50, it is likely that Gilt yields will rise further.

 

JGBs ignored the other major markets. The Bank of Japan made it clear that they would target a zero yield on 10yr JGBs, which closed the month at +0.02%. If US and European yields continue to climb next year it will be interesting, to mis-quote Shakespeare, to see the mettle of the BoJ’s pasture.

Commodities

Gold fell from an election high of $1,318/oz on 9th to close the month just above its low at $1171. The political triumvirate of Republican control is historically good for stocks and good for the dollar – Gold has been a casualty.

 

The copper market is a different story. Starting the month at its low of 2.2c/lb, it rallied, post-election, to trade 2.72c/lb. Expectation that US policy will be expansionary is supportive for this bellwether of industrial metals.

 

Oil had its own issues which overshadowed even the US election. OPEC finally agreed to cut production by 1.2mln bpd (4.5%) on 29th and WTI closed the month within half a dollar of its high at $49.44. The fact that Russia agreed to cut production by 300,000 bpd offset Iranian recalcitrance – they refused, even, to freeze their output. WTI rallied 7% on the day of the announcement – it remains to be seen whether OPEC members now proceed to cheat, as they have always done in the past, and how US producers, spurred on by higher prices, respond. The Baker Hughes US rig count continues to rise (from 450 on 4/11 to 477 on 2/12) but there is plenty of room for expansion. As recently as October 2014 the rig count was over 1,600.

 

Mexico

Perhaps the greatest market impact of the US elections was felt in Mexico. The peso weakened to an all-time low of USDMNX 21.42 on 11th versus $18.15 on 9th- an 18% move in two days! 10yr Mexican bond yields jumped from 6.16% of 8th to 7.50% on 23rd – the highest yields since March 2011. Meanwhile the IPC Stock Index fell from a high of 48,673 on the 8th to a low of 43,999 on 18th. Stocks have since recovered somewhat, closing the month at 45,316.

 

The weakness of the peso has afforded the stock market some protection but fears about the US imposing tariffs, tearing up NAFTA, building a wall and deporting illegal immigrants, will be felt more keenly in Mexico than anywhere else.

 

You can catch Colin Lloyd’s roundup every fortnight on Linear Talk. Follow us on YouTube and LinkedIn to stay up-to-date with the latest videos and articles. Download the Macro Roundup PDF here

Hedge Fund Roundup – October 2016 – Challenges for Managed Futures

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.

Hedge Fund Performance – September 2016

Hedge Fund Performance, Trades and Industry Trends – September 2016

Author – Colin Lloyd

 

Performance and Trades

September saw a bifurcation between the performance of hedge funds and managed futures with the former rising while the latter mostly declined.

Hedge Funds Barclay Hedge Fund Indices Sept No. of Funds YTD
Barclay Hedge Fund Index 0.81% 2292 4.27%
Healthcare & Biotechnology Index 5.39% 38 0.65%
Technology Index 1.88% 26 4.66%
Distressed Securities Index 0.94% 30 8.12%
Emerging Markets Index 0.88% 318 10.08%
Merger Arbitrage Index 0.86% 35 4.28%
Multi Strategy Index 0.81% 81 3.73%
Equity Long/Short Index 0.76% 365 0.88%
Fixed Income Arbitrage Index 0.74% 20 2.73%
Pacific Rim Equities Index 0.65% 27 -1.42%
European Equities Index 0.64% 94 -4.95%
Equity Market Neutral Index 0.57% 76 -0.82%
Event Driven Index 0.57% 83 8.50%
Convertible Arbitrage Index 0.42% 22 4.10%
Global Macro Index -0.55% 134 -1.42%

Source: Barclayhedge

 

The Barclayhedge Hedge Fund Index rose during September to finish +0.82%, which brings it to a respectable +4.27% YTD – it is shaping up to be the best year since 2013, but anything less than double digits is unlikely to reduce the downward pressure on hedge fund fees.

Healthcare and Biotech staged a spectacular rebound in last month (+5.39%) helping the sub-index into positive territory for the year (+0.65%). Stocks like Gilead Sciences (GILD) Celgene (CELG) Allergan (AGN) and Regeneron (REGN) all rebounded after summer weakness. October has been a different story.

Technology was also well supported, with buying of EMC Corp (EMC) Nvidia (NVDA) and Infosys (INFY) to name but a few. A September return of +1.88% takes the index to +4.66% YTD.

Distressed securities had another positive month (+0.94%). Many of the names which had a strong month were in the energy sector where an increase in crude oil, amid hopes of an OPEC deal may have been a contributing factor.

Emerging Markets continued to perform as capital flowed into the sector. This is the only hedge fund index to achieve double digit YTD returns (+10.08%) although Event Driven (+8.5%) is not far behind.

M&A deals which raised the Event Driven sector again included, Bayer (BAYN) raising its bid for Monsanto (MON) to $66bln – but there will be a long wait for regulatory approval, so the pair trades cheap. The AB Inbev (BUD) merger with SABMiller (SAB) finally closed, however, which should free up cash and will allow funds to crystallise their gains.

On the short side, high profile short seller Jim Chanos (Kynikos Associates) has been selling Tesla (TSLA) as they attempt to acquire Solar City (SCTY) but Japanese banks have been a favourite short-selling target, as the dual Bank of Japan and Ministry of Finance stimulus fails to deliver growth and the flatness of the yield curve cuts into bank profits. In Europe the dismal fortunes of Deutsche Bank (DB) encouraged a rise in short-sales, although, since month end larger hedge funds have been exiting shorts. Other shorts which have been pared during the month include Aberdeen Asset Management (AND) and Ashmore (ASHM) amid signs of a sustained recovery in asset flows, especially to emerging markets.

 

Managed Futures Barclay CTA Indices Sept % of Funds YTD
Barclay CTA Index -0.41% 85.41% 0.09%
Agricultural Traders Index 0.49% 96.30% -1.38%
Discretionary Traders Index -0.17% 92.63% -1.81%
Fin./Met. Traders Index -0.22% 91.78% 2.09%
Systematic Traders Index -0.39% 84.44% 0.31%
Currency Traders Index -0.78% 79.59% 0.25%
Diversified Traders Index -0.81% 84.13% -0.46%

Source: Barclayhedge

Managed futures (-0.41%) and Global Macro (-0.55%) by contrast had another difficult month. Agricultural traders benefitted from trends in Lean Hogs, Orange Juice and Sugar – one of the year’s top performers and up more than 100% since 2015. The rally in oil also helped the larger futures operators but, elsewhere, reversals in interest rates, which spilled over into stocks, put the majority of systematic diversified traders on the defensive.

 

Industry Trends

September is always a time for new fund launches and credit strategies have seen significant interest from investors this year. For example, hedge fund seeder, Protégé Partners announced that they are backing Mill Hill Capital, a new start up in the US Credit space. Another theme, supported by performance year to date, is Emerging Markets; Marble Bar Asset Management launched Elephant Asset Management on their hedge fund platform last month. Direct lending by hedge funds, filling the role vacated by traditional banks, has been another theme this year. Omni Partners applied for a banking licence for Amicus Finance. Also in this sector, ex-Blue Bay PM, Klaus Petersen, launched Apera Capital to focus on direct lending.

With disappointing single digit returns in many strategies this year, much has been written about the decline in hedge fund assets under management. Here are some of the winners and losers in asset gathering this year.

 

Outflows

Brevan Howard has now seen AUM fall to $18bln from $23.7bln. At the end of August the BH Master Fund was down 3.4%, which, after losses in 2015 (-2%) and 2014 (-0.8%) seems to have tired investors patience. The fact that ex-Brevan PM, Chris Rokos, is up 8% YTD can only aggravate the situation. Brevan are rumoured to have reduced fees for some clients. BH Macro, the LSE listed vehicle, waved management fees as of 3rd October.

Tudor Investment Corporation has also reduced management fees to 2.25% from 2.75% and performance fees from 27% to 25% as AUM has declined from $17bln to $15bln. They still have some room to manoeuvre, but the knock on effect is unwelcome.

Omega Partners, run by Goldman Sachs alumni Leon Cooperman, has seen a 16% decline in assets, to $6.9bln, as it prepares to counter SEC allegations of insider trading. Apparently $300mln has been redeemed by Goldman employees.

 

Inflows

Bridgewater Associates continue to garner assets despite unspectacular performance. They have increased AUM by $22bln (16%) mostly for the Optimal Strategy and less so for Pure Alpha.

Renaissance Technologies has seen AUM rise by more than $7bln to $36bln. According to the Wall Street Journal, the Renaissance Institutional Equity Fund (RIEF) was up 15.3% on the year to 23rd September. This follows 17% in 2015 and 15% in 2014. Diversified Alpha was not far behind +12% to 23rd September.

Paloma Partners, who are also backing a credit fund launch later this year, have continued to grow AUM adding $1.3bln this year to reach $5.3bln – up from $2.3bln in January 2015. Paloma, which was founded in 1981, is one of the oldest hedge fund investors. That they are expanding, even as others decline, bodes well for the industry.

 

Asia

After a period of relative retrenchment, Asian hedge fund activity is on the rise once more, helped by the recovery in emerging markets. Steve Cohen’s Point72 Asset Management are hiring as are Caxton Associates and Brevan Howard.

 

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