Arb Hedge Funds Lead in August; CTAs Have another Disastrous Month

Arb Hedge Funds led the pack in August according to a new report from Natixis research. Although EVERY single type of hedge fund strategy is trailing the S&P 500 (.INX), some strategies are doing better than others. Among the poor performers, CTAs had another disastrous month, although Rothschild Wealth Management is now bullish on CTAs. Below is the latest from Natixis (see the latest detailed hedge fund performance from hedge weekly here).

After the rebound in July, August was marked by negative performances in all assets. The S&P 500 was particularly affected, down 3.1% on expectations that the Fed would taper its asset purchases. Emerging countries, victims of fresh capital outflows, saw their equity markets (in USD) fall 1.9% and also suffered on the bond side (-2.7% for the EMBI). As in June, all assets were in the red and these performances were reflected in hedge funds’ NAV, especially those known for their long equity bias (Long/Short -1.1%). All in all, the HFRI index was down 0.8% and the Credit Suisse Hedge Fund Index was down 0.5%.

• The worst performance was recorded by CTA funds (-2.8%), bringing their losses to 9% in three months. Trend following strategies suffered from this uncertain market environment, once again with a sharp downturn in August compared with July. Negatively affected by the lack of safe haven (-0.5% for US Treasuries), Global Macro also closed the month in the red, at -0.9%.

• Emerging funds were rather well prepared and reported a very limited loss: only -0.2% compared with an emerging market that declined by 1.9% for equities, and by 2.7% for bonds (EMBI) and a very turbulent foreign exchange market. The fundamentally worsened economic situation of some countries had already driven managers to partly reduce their exposures while taking advantage of the dispersion of the performances (good performance in some Asian markets in particular).

Arb hedge funds

• The majority of arb hedge funds recorded virtually zero performances, from -0.5% for Equity Market Neutral to +0.2% for Fixed Income Arb hedge funds. In this manner they fulfilled their mandate, and showed a limited directional exposure. Lastly, the only funds to report a significantly positive performance were Convertible Arb hedge funds (+0.7%), which seem to have benefited from the recent increase in bond volatility and the resilience of High Yield spreads (-4bp in August).
Against such a backdrop, Natixis continues to favor arbitrage strategies in order to take advantage of an eventual rise in volatility over the next few months, notably in Fixed Income given the announcement of the postponement of Fed tapering. Directional strategies, in particular CTAs, should still be avoided.



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