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TOP MACRO HEDGE FUNDS SURGE AS U.S. ELECTION UNCERTAINTY RISES
Top firms lead HFRI Asset Weighted to October advance; Quant CTA, Tech, Activist declines offset Credit, Emerging Markets gains
CHICAGO, (November 7, 2016) – Hedge funds posted mixed performance to begin the fourth quarter, as U.S. equities weakened amidst increasing uncertainty before Election Day, not just on the Presidential-front, but also with regard to the control of Congress and state-level results. Rising market uncertainty resulted in a divergence between top hedge fund firms, which produced strong gains, and smaller firms, which suffered declines. The HFRI Asset Weighted Composite Index (AWC) posted a gain of +0.6 percent for October, driven by strong returns in leading Macro funds, while the HFRI Fund Weighted Composite Index® (FWC) fell -0.6 percent for the month, bringing the Index Value to 12,722, as reported today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry.
October represents the fourth consecutive monthly gain for the HFRI Asset Weighted Composite Index and the largest since the AWC Index gained +1.4 percent in July. October was also the first monthly decline for the HFRI FWC since February, paring the YTD gain to +3.6 percent. Despite the decline, the HFRI FWC outperformed both U.S. and global equities by 120 and 140 basis points (bps), respectively, in October, expanding the YTD performance differential over global equities to approximately 180 bps and narrowing the YTD differential to US equities to 230 bps.
Macro hedge funds experienced a wide performance differential by firm size in October, as commodities fell and the U.S. Dollar gained. The HFRI Macro Index (Asset Weighted) surged +1.3 percent, the strongest monthly gain since November 2015, driven by falling investor risk tolerance, uncertainty over the U.S. election, and expectations for near-term interest rate increases. The equally-weighted HFRI Macro (Total) Index declined -1.5 percent for the month, the third consecutive monthly decline, paring YTD performance to a gain of +0.2 percent. Trend-following strategies posted a sharp decline concentrated in fixed income and commodity metals, with the HFRI Macro: Systematic Diversified Index falling -2.9 percent, dropping YTD performance to -1.9 percent. Offsetting CTA losses, the HFRI Macro: Discretionary Thematic Index advanced +1.2 percent, though both the HFRI Currency Index and HFRI Commodity Index posted narrow losses. Led by regional exposures to MENA and Latin America, the HFRI Emerging Markets (Total) Index added +1.5 percent for the month, increasing YTD performance to +9.6 percent.
Despite the U.S. election uncertainty and the increase in bond yields, fixed income-based Relative Value Arbitrage (RVA) strategies posted gains in October as M&A activity surged. The HFRI Relative Value (Total) Index advanced +0.2 percent for the month, the 8th consecutive monthly gain, bringing YTD performance to +6.0 percent. RVA sub-strategy performance was led by the HFRI Volatility Index, which gained +1.3 percent for the month, and the HFRI RV: FI-Asset Backed Index, which added +1.1 percent. For the year, RVA sub-strategy performance is led by the HFRI Yield Alternatives Index, which has gained +11.0 percent YTD, despite falling -3.2 percent in October.
Event-Driven (ED) strategies also posted gains for the month, as M&A activity surged on announcements in AT&T/Time Warner and GE/Baker Hughes transactions; gains were offset by volatility in widely-held shareholder activist positions. The HFRI Event-Driven (Total) Index posted a narrow gain of +0.04 percent in October, as ED continues to lead all strategies YTD with a +6.8 percent return. Distressed hedge funds led all ED sub-strategies in October, as the HFRI ED: Distressed/Restructuring Index advanced +2.4 percent, extending its YTD return to +11.6 percent; Credit Arbitrage and Multi-Strategy ED hedge funds also added gains in the month. The HFRI Activist Index fell -1.9 percent in October, as volatility increased in several widely-held activist positions, despite the surge in M&A activity. The HFRI ED: Special Situations Index fell -0.7 percent in the month, although the Index remains +8.0 percent for the year.
Similar to Macro, Equity Hedge (EH) strategies also posted mixed October performance as equities declined, with larger Equity Hedge funds posting gains while smaller funds produced declines. The HFRI Equity Hedge Index (Asset Weighted) advanced +0.06 percent for the month, while the equally-weighted HFRI Equity Hedge (Total) Index declined -0.5 percent, paring its YTD return to +3.7 percent. EH sub-strategy gains in Fundamental Growth and Market Neutral were offset by declines in Technology and Energy exposures. The HFRI EH: Technology/Healthcare Index fell -3.4 percent in October, the largest monthly decline since January 2016, while the HFRI EH: Fundamental Growth Index advanced +0.6 percent for the month, bringing YTD performance to +5.6 percent.
“Falling investor risk tolerance drove gains at defensively-positioned, top hedge fund firms across Macro and Equity Hedge strategies in October, while surging M&A activity drove gains within Relative Value Arbitrage and Event Driven strategies, despite sharp declines among widely-held shareholder activist positions,” stated Kenneth J. Heinz, President of HFR. “Despite the uncertain result of the U.S. election on Tuesday, financial market volatility is likely to persist post-election, as markets discount a divided voter base for the coming term. Hedge funds positioned for the continuation of this uncertain macroeconomic and political environment are likely to lead industry performance into 2017.”
Comments reference Flash Update performance figures as posted on November 7, 2016.