Managed futures: Two months removed from their post-BREXIT superb returnsVW Staff
Distressed and Activist Hedge Funds Again Lead in August & YTD by eVestment
- Average hedge fund industry performance was +0.18% in August, and +3.47% YTD 2016.
- Commodity funds posted their fourth monthly decline of 2016, falling -1.12%.
- Distressed funds produced another month of elevated returns, +2.18%, their fourth >2% monthly return of 2016.
- Two months removed from their post-BREXIT superb returns, managed futures funds were negative for the fourth time in six months.
With global capital markets generally grinding higher in in August, and mixed price movements across the commodity spectrum, equity and credit investors benefited most. Unlike the broad gains the industry experienced in July, August produced only slightly more winners than losers, with macro and managed futures funds having the highest concentrations of losses.
From a strategy perspective, distressed managers have emerged as industry leaders, benefiting from the rebound within energy sector credits, and emerging market hedge funds have been riding country specific exposures of Brazil and Russia for elevated returns.
Distressed and Activists Again Lead in August & YTD
Hedge funds gained +0.18% in August. The industry average is +3.47% YTD 2016.
For a second consecutive month, discretionary approaches to opportunities in corporate capital structures, including equity and credit markets, produced the best returns across the hedge fund industry in August. Overall, just 56% of the industry produced gains in August, down from 80% in July, which was the best month of broad returns since February 2014. August was not nearly as beneficial to macro and managed futures funds. The vast majority of funds in both groups declined in August, leaving both lagging most of their hedge fund peers in 2016.
- Investors’ allocation and redemption decisions have likely not met expectations in 2016. Event driven funds had more money removed in both 2015 and 2016 than any other primary strategy. In 2016, the group has produced leading returns, 85% of managers are producing positive returns, and those with gains have returned an average of +8.12%.
- Managed futures funds have received more new assets in 2016 than any other primary strategy, $16.2 billion through July. Volatility in commodity prices and volatile but range bound currency movements have been a factor causing the group to lag most other strategies this year. Four monthly losses in 2016, including a streak of three prior to the huge gains in June following the surprise BREXIT vote, have begun to impact flows.
- The largest gainers of new assets in the last few years prior to 2016, multi-strategy funds, have rebounded a bit since their difficult second half of 2015, which carried over into January. Since January, the universe has returned an average of +4.55%. Investors, however, appear to have reacted quickly to those prior losses. In the last three months ending July, redemptions reached nearly $10 billion from the universe. Multi-strategy fund flows had been a bedrock of growth for the industry, and it will be interesting to see if enthusiasm returns along with recent good returns.
- Commodity funds had been a segment rewarding those who dared to allocate at the end of 2015 and into 2016 in the face of major losses. Despite energy commodity prices rising in August, losses across metals and agriculture sectors appeared to cause a second consecutive monthly performance decline for the group. While YTD gains within the universe are still above average in 2016, recent returns may shake the conviction of investors.
- Distressed hedge funds produced another strong month in August. Gains of +2.18% were the universe’s fourth month above the 2% threshold in 2016. It is rare within a primary strategy to see average returns so high, as varying directional and sector exposures tend to result in a dampening of gains or losses. Normally, this apparent unity is exhibited in emerging market country specific segments. The uniformity of returns within the distressed segment this year is further evidence of the concentration of positions, and resulting gains, in energy sector credits.
Comparison of Distressed Hedge
Funds to Energy Sector Credit Markets
This chart contains the inverse of the last three year cumulative returns for distressed hedge funds (left axis) and the S&P/ISDA CDS U.S. Energy Select 10 Index, which tracks the performance of credit default swap (CDS) spreads for reference entities in the U.S. energy sector. CDS spreads provide an indication of default risk of the underlying credits.
The chart is meant to illustrates the relationship between distressed hedge fund performance and default risk within the energy sector credit universe.
EM Rally Continued in August Again Led by China
After a rough start to begin 2016, emerging market hedge funds have benefited as the strength of the USD declined and energy prices rebounded. While exposure to Brazil and Russia had been leading this resurgence, funds investing in China have seen returns increase in each of the last three months. The near-term rebound from the China-focused universe has come as redemption pressures have continued.
Regional Performance Overview
- Investors in Brazil suffered large losses as the USD strengthened against Brazil’s currency throughout 2014 and 2015. With a reversal of this trend in 2016, and yet only posting only slight gains in August, Brazil-focused managers remain on pace for their best year on record since 2009, and third best since 1999.
- Funds investing in developed European markets have suffered in 2016, primarily due to losses early in the year and in June in the wake of the BREXIT vote. Near flat returns in August, a month in which both European equities and credit markets were generally positive, illustrates the divergent post-BREXIT positioning within the universe.
- Funds investing in Russia continued to perform well in August. The universe still lags Brazil-focused funds in 2016, but have outperformed all emerging markets over the combined 2015/2016 period. Russia-focused funds have shown a history of either leading, or trailing all other segments of the industry. Only one time on record have annual returns averaged lower than +/-10%. This occurred in 2000, after the universe produced returns of +126.05%, -72.32% and +126.05% in 1997, 1998, and 1999, respectively.