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Macro funds surge to strongest month since 2010; Defensive, hedged positioning limits exposure in Equity Hedge, Event-Driven
CHICAGO, (July 8, 2016) – Hedge funds posted gains in June, as global financial markets experienced massive dislocations across currency, equity, fixed income and commodity markets pursuant to the result of the UK referendum on EU membership (‘Brexit’). The HFRI Fund Weighted Composite Index® gained +0.8 percent for the month, the fourth consecutive month of positive performance, as reported today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry. Macro strategies posted their strongest monthly gain in over five years, while defensive hedging limited exposures of directional Equity Hedge and Event-Driven strategies.
June performance topped most regional equity markets for the month, with the notable exception of UK equities. The monthly gain brings 1H16 performance of the HFRI Fund Weighted Composite Index to +1.6 percent, in line with small gains for the S&P 500 and DJIA, and well ahead of most European and Asian equity markets, as well as the Nasdaq Composite Index.
Macro hedge funds led strategy performance for June, as the British Pound Sterling collapsed concurrent with and pursuant to the publication of Brexit vote results, with the HFRI Macro Index surging +3.0 percent for the month, the strongest gain since December 2010. Quantitative, trend-following CTA hedge funds were the leading area of sub-strategy performance, with the HFRI Macro: Systematic Diversified/CTA Index advancing +4.4 percent for the month, with contributions not only from currency exposures long US Dollar and Japanese Yen against the British Pound Sterling, but also from positioning in fixed income, commodities and equities. All areas of Macro sub-strategy performance advanced in June, with HFRI Commodity Index gaining +3.4 percent, HFRI Active Trading Index adding +3.2 percent, HFRI Currency Index up +1.4 percent, and HFRI Discretionary Thematic Index advancing +0.3 percent. June performance vaulted Macro to the leading area of hedge fund strategy performance for 1H16, gaining +3.5 percent YTD, despite declining in each of the three prior months after a strong start to the year.
Fixed income-based Relative Value Arbitrage (RVA) strategies also gained for the month as yields plummeted on investor risk aversion, with the HFRI Relative Value Index adding +0.3 percent in June, bringing 1H16 performance to +2.3 percent. RVA sub-strategy performance was led by exposures to sovereign fixed income and yield alternatives, including energy infrastructure partnerships, with the HFRI RV: Sovereign Index advancing +1.4 percent, while the HFRI Yield Alternatives Index added +2.5 percent. These two sub-strategies were the strongest areas of RVA performance in 1H16, gaining +5.0 and +9.7 percent, respectively. Asset Backed and Volatility Arbitrage strategies posted narrow declines for the month.
Equity Hedge strategies turned in a mixed performance for June, as global equity markets posted steep losses on the Brexit vote, with UK, US and Asian equities recovering much of the intra-month decline by month-end. The HFRI Equity Hedge Index declined -0.27 percent for the month, bringing 1H16 performance to -0.16 percent, topping most European and Asian equity markets for the period. The HFRI EH: Fundamental Value Index fell -0.8 percent in June, the largest EH sub-strategy decline, as Financials posted steep losses across all regions which were extended into month-end, even as broad-based indices recovered losses. The HFRI EH: Short Bias Index added +2.4 percent for the month, bringing 1H16 performance to +9.5 percent; the HFRI EH: Energy/Basic Materials Index led EH sub-strategy performance for 1H16 with a gain of +10.3 percent.
Event-Driven strategies also experienced mixed performance for the month, as risk aversion spiked, deal spreads widened and strategic acquisitions were re-evaluated by companies as a result of the Brexit vote. The HFRI Event-Driven Index declined -0.4 percent in June, paring its 1H16 gain to +1.9 percent. Activist and Multi-Strat were the weakest areas of ED sub-strategy performance, with these HFRI Indices declining -1.6 and -1.2 percent, respectively, for the month. Distressed hedge funds were the leading area of ED sub-strategy performance for both June and 1H16, with the HFRI ED: Distressed Index advancing +0.7 for the month and +3.9 percent YTD.
“Hedge funds were positioned conservatively and defensively for an uncertain outcome of the Brexit vote, anticipating volatility and the potential for market dislocations even despite pre-vote gains in UK equities and sterling, which had prematurely and ultimately incorrectly discounted a different outcome of the UK referendum,” stated Kenneth J . Heinz, President of HFR. “In addition to the powerful realized performance impact of these dislocations, the hedge fund industry continues to carefully position for additional, second-order impacts of Brexit in 2H16. Economic and financial implications include impact for UK and EU growth, near term US and Asian monetary policy, banking domicile and financial products passport distribution restrictions, as well as the political implications of immigration, UK political leadership transition and additional regional referendums. In short, Brexit has dramatically increased the degree of global macroeconomic uncertainty for 2H16; hedge funds positioned for this dynamic environment posted strong gains in June and are likely to lead industry performance and growth in 2H16.”
Comments reference Flash Update performance figures as posted on July 8, 2016.