Tectonic Shifts In Hedge Fund Performance
Hedge funds are on track to deliver their best year since 2013 according to the HFRI Fund of Funds Composite Index, a broad and reliable benchmark which is up 6.8% year to date (as of end-October). The Lyxor Hedge Fund index, which is narrower and only composed of liquid alternative funds, is up 4.7% year to date (as of November 7th). Provided that performance stays strong in November and December, this year could be the best year for hedge funds since 2009.
The sources of hedge fund returns, after two disappointing years in 2015 and 2016, are first related with solid equity market performance, no sudden jumps in volatility in asset prices and the absence of disruptions in the fixed income market. But beyond the surface, the sources of hedge fund returns have switched over the course of the year:
- The first half of 2017 saw Event-Driven and L/S Equity outperforming. These two strategies have a relatively higher beta in the hedge fund space (close to 0.4 in both cases using Credit Suisse hedge fund indices over the past five years versus the MSCI World - hedged USD in total return).
- Meanwhile, the second half of the year is seeing Global Macro and CTAs outperforming. These strategies have a relatively lower beta, at 0.25 and 0.15 respectively, using the same timeframe and indices than above.
In a nutshell, robust hedge fund performance this year was more a beta-driven story in H1, but less so in H2 so far. Going forward, we maintain firm convictions on Global Macro, a strategy that we upgraded back in June. Their cautiously bullish views on equities, defensive stance on fixed income and long USD positioning fits well with our scenario. With regards to CTAs, we upgraded the strategy to Neutral in September on the back of improved trend following conditions (but still fragile in FX and Fixed Income markets). Finally, we continue to prefer Event-Driven to L/S Equity strategies. Tax reform in the U.S., which seems increasingly likely, will likely provide ample investment opportunities for Event Driven funds.
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