Hedge Fund Leverage Moving Higher – ValueWalk Premium

Hedge Fund Leverage Moving Higher

December was a strong month for hedge funds, a JP Morgan Prime Brokerage report on global hedge fund trends reported. At the end of 2016, there was a decided trend among institutional investors to favor investment managers “that are less correlated to the markets” and those in “niche and off-the-run” strategies, particularly in the US. In the January 19 report, manager shifts among strategies were noted, particularly in Europe and Asia.
2016 Hedge Fund Letters

Event driven funds up 1.47% in December, up 10.22% on the year
The hedge fund strategy winner in December was Event Driven funds, up 1.47% basis JP Morgan’s survey. Relative Value funds followed, up 1.20% on the month, with Macro funds, up 1.17%. Those strategies were up on the year 10.22%, 7.82% and 1.49% respectively.

Event Driven managers benefited from strong US equity markets amid higher government bond yields, two typically negatively correlated factors. The Activist Index, a sub-category, rose 2.5% in December.

Among Relative Value strategies, Alternative Yield strategies were up 2.6% and are the leading strategy in the category on the year, up 17.6%.

In the Macro category, CTA strategies delivered the bulk of positive returns as did Macro funds with Energy exposure. The commodity markets were the biggest winner in December, up 5.56% in December, more than doubling the S&P 500 Total Return Index, which generated 1.98% on the month. On the year commodities finished 2016 up 27.7% while the S&P 500 was up 11.96%.

Leverage generally moving higher
Gross leverage increased across most strategies on the month, with Multi-Strategy funds bucking the trend. Market Neutral strategies, up 5% on the month, remain at the highest leverage levels among all funds at over 50%. Convertible Arbitrage, up 4.5% on the month, quickly follows as having high leverage after a noticeable jump from October to November.


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