Long/Short Equity Turns Red, Event Driven Funds See Revival

Long/short equity turns red, event driven funds see revival, fixed income funds show resilience, and crypto rise sparks investor interest in macro

Q1 2021 hedge fund letters, conferences and more

HFM Insight’s latest strategy reports covers the latest performance vs benchmarks, investor flows and key trend analysis. This month’s release features five hedge fund strategies.

Highlights:

• Long/short equity flows turned negative (-$9.3bn) in March and YTD (-$10.4bn) while HFM’s Long/Short Equity Composite Index was +0.6% in March and +6.5% YTD
• Event driven flows turned negative (-$0.6bn) in March and also YTD (-$0.1bn) as HFM’s Event-driven Composite Index was up +1.2% in March and +6.8% YTD
• Fixed income flows were flat ($0bn) in March and remain negative YTD (-$1.1bn). and HFM’s Fixed income/credit Composite Index was +0.7% in March and +2.6% YTD
• Managed futures flows turned positive ($0.4bn) in March and YTD ($0.8bn), HFM’s Managed Futures Composite Index was -0.1% in March and +2.5% YTD
• Macro flows turned negative (-$4.7bn) in March, wiping out January inflows, and HFM’s Macro Composite Index returned +0.7% in March and is now +1.6% YTD

A summary is included below and the compiled report is available for download. If you require more information on this report, have data queries or interview requests, please do not hesitate to contact me. As a reminder, with Pageant Media’s acquisition of Eurekahedge, you now have insights from both HFM and Eurekahedge when it comes to information and data requests – feel free to check in about data from either brand.

L/S EQUITY

Equity flows turn red as investors change tack: Net outflows of almost $10bn in March turned long/short equity flows negative in Q1, as part of total hedge fund outflows YTD of almost $20bn. The reversal for long/short equity from net inflows in February suggests investors changed tack as vaccine rollouts continued and economies looked to a consumer-led pandemic recovery. The reversal comes despite encouraging performance numbers. Given the turbulence in markets, the scale of government intervention and the continued Covid-19 threat, only consistent, sizeable outperformance will reassure capital allocators. Macro funds have benefited from this shift in investor sentiment and the potential for widespread and enduring global price dislocations. However, the threat of coronavirus variants and further waves of illness disrupting this schedule could see a return to long/short equity as a strategy for protecting capital and reassuring partners.

(Source: HFM Insights)

EVENT DRIVEN

Event-driven revival gathers momentum: A sixth consecutive month of performance gains in March ensured event-driven funds had one of their better quarters, despite March withdrawals turning quarterly flows net negative. A 1.2% gain in March saw HFM’s Event-driven Composite Index finish Q1 2021 on 6.8%, widening its lead over the global composite index on a 12-month basis and matching it on a 3-year annualised basis. Because of the increased number of distressed companies facing liquidity issues from the pandemic, the trading environment will likely continue favouring larger event-driven funds and funds with easy access to capital in 2021. These factors, and the 31% of investors surveyed in Q4 2020 set on increasing their allocations to event-driven, bode well for event-driven managers heading into Q2. The revival in event-driven opportunities during H2 2020 has only gathered pace in 2021, and we can expect further positive movement for the strategy as capital markets begin to normalise.

(Source: HFM Insights)

FIXED INCOME

Fixed income hedge funds demonstrate resilience: The HFM Fixed Income Composite returned 2.6% over Q1 2021, a period during which the yield on US 10-year Treasuries rose considerably due to inflation concerns. But despite lagging the top-level hedge fund benchmark, credit and fixed income hedge fund performance demonstrated an ability to offer downside protection. Credit and fixed income hedge funds generated nearly half the performance they managed in 2020 in Q1 2021 alone. The return of inflation meant that in March, the benchmark 10-Year US Treasury Yield rose by over a fifth, causing a drop in bond prices. This reversal in fortunes for Treasuries has reminded investors of the need for risk mitigation in the fixed income space, while some are considering a move away from traditional fixed income. Hedge fund managers interviewed by HFM noted that they had received interest from allocators considering a move away from long-only fixed income. Indeed, despite outflows from the strategy in Q1, these were relatively modest and may well be reversed following fixed income firms’ recent strong performance. A pitch mindful of allocators’ reasons for investing in bonds will prove key to capturing any capital migrating away from long-only fixed income.

(Source: HFM Insights)

CTA/MANAGED FUTURES

CTAs post Q1 gain despite mixed March: Just a second month of net inflows since September helped managed futures funds finish Q1 2021 on a high, albeit with performance down on a strong February. HFM’s Managed Futures Composite index retreated 0.1% in March, but still finished Q1 2021 up 2.5%. Rising stock markets and currency positions, particularly a higher US dollar, were responsible for most of the March gains in managed futures, while commodities and bonds held them back. Initial HFM data shows investors added net $0.4bn to managed futures last month. And with the Q1 flow just positive, at $0.8bn, there are signs that investor sentiment to managed futures is improving, following three months of outflows in Q4 2020.

(Source: HFM Insights)

MACRO

Crypto rise sparks investor interest in macro strategies: HFM’s Macro Composite closed the opening quarter of 2021 up 1.6% after gaining 0.7% in March. But it lagged the broader HFM Global Composite Index in Q1 (4.9%), and macro funds saw net outflows over the period, despite some compelling thematic trades, as investors baulked at the strategy’s lacklustre performance compared to equity markets. A handful of brand-name managers won tickets from institutional investors in the past few months, but overall macro hedge funds saw outflows of $1.7bn year-to-March, on top of a $21.7bn decrease last year. One source of investor interest has been the continued rise of cryptocurrencies. As the price of Bitcoin surpassed $60k for the first time in mid March, many allocators expressed interest in macro managers that would provide exposure to the nascent asset class. Bitcoin is up 103% for the quarter, boosting performance for early movers into the space – with hedge funds and funds of funds posting strong gains. As inflation worries loom over investors, many are seeing Bitcoin as a hedge against inflation. The digital ‘gold-alternative’ also surpassed a milestone $1trn market cap during the quarter.

(Source: HFM Insights)

*Analyst note: HFM performance indices represent the mean average return of funds on the HFM platform. Indices are based on reported data at time of publication and are subject to future revision.

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