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Hedge Funds Down In Feb

Algorithm based hedge funds fell in February, despite being one of the most consistently performing funds for the last five years, as volatility raged through the second month of the year.

According to data from Hedge Fund Research, the HFRI Equity Hedge: Quantitative directional Index and the HFRI Macro: Systematic Diversified index were two of the worst performing indices in February with losses of -2.28 and -6.49, respectively. The losses wiped out all gains in the HFRI Macro: Systematic Diversified index from January when it returned 4.75.

The month as a whole was one of the worst in over a year for hedge funds overall and reversed many of the gains made in January. Data from HFR shows that the HFRI Asset Weighted Composite Indices was down -1.87 in February. Macro strategies were the worst performing groups with the HFRI Macro (Total) Index - Asset Weighted falling -2.76.

On 5th February the DJ Industrial Average dropped 4.6% in one day, its biggest day drop for seven years. The S&P 500 fell nearly 4% in February, while the VIX index jumped 47%. It prompted a huge sell-off, which spurred volatility. 

Danny Dayan, founder and CIO of hedge fund DWD Partners, said: “We advocated a long volatility position in January because market positioning had gone euphoric and volatility was far too cheap. The short volatility trade had gotten too large, both through direct and indirect exposures.”

VIX ETPs represent direct exposure to the VIX, which Dayan explained were short the VIX in large sizes, and this unwind was messy and led to large losses.

The shock month comes after years of low volatility – something hedge funds usually capitalise on. However, its violent and brief swing meant that many hedge funds were unable to do much with it.

“The indirect exposures consist of risk parity funds, CTAs, algorithmic strategies and hedge funds who used volatility as an input into their asset allocation into equities. When volatility was low they allocated more to equities, often using leverage. Once volatility spiked, they had to de-lever their portfolios and reduce risk. Far too many hedge funds have a high beta to the market, so when the market suffers they go down with it,” he said.

Prior to February equity based systematic strategies had the highest consistency score of 98.5, according to a report from Preqin earlier this month. 

However, it wasn’t entirely negative news. The HFRI Emerging Markets MENA index saw a 2.38 rise, the second best month since July last year.