Investors eye outliers as overall hedge fund gains flat YTD

For hedge fund investors, diversification feels a bit like a zero-sum game or at the very least a 50/50 shot when it comes to making gains so far in 2020.

Database providers showed anemic single-digit gains in July across the board for hedge funds, while for the year-to-date through July the hedge fund composites agree that strategies generally are flat.

“Hedge funds surged across a wide range of strategies in July, driving the HFRI into positive territory for the year, with strong performance in Technology, Shareholder Activist, CTAs and Volatility, as well as Blockchain/Cryptocurrency, Risk Parity, Risk Premia and liquid alternative products,” said HFR’s Kenneth J. Heinz.

The outliers for the month were within equity hedge and macro strategies. The HFRI Equity Hedge (Total) Index led strategy performance for the month, surging 3.7%, with strong contributions from Energy and Technology exposures. The HFRI EH: Sector-Energy Index vaulted 5.0% in July, while the HFRI EH: Technology Index jumped 4.1% percent in July, bringing the YTD return for the tech index to 14.1% percent, leading all sub-strategies for the year.

Hedge fund returns in July

eVestment: 3.43%
HFRI Asset-Weighted Composite: 3.24%
Pivotal Path: 1.9%

Hedge fund returns YTD through July

eVestment: 0.01%
HFRI Asset-Weighted Composite: 0.27%
Pivotal Path: 0.6%

“Institutional investors are actively looking to increase exposure to hedge funds and alternative strategies in 2H20 as a direct and ongoing result of the intense and extreme volatility from 1H20, including both realized and implied volatility, and positive and negative market cycles,” added Heinz.

He finds that the positive performance in 2020 has contributed to expectations for strong industry-wide growth into 2021.

Pension funds like the Los Angeles County Employees’ Retirement Association have focused mostly on credit managers and reported recently in board documents that it was in late-stage diligence on several illiquid credit managers in the spring with Magnetar Capital ultimately winning a $400 million mandate from the California retirement fund that was funded at the beginning of August.

Indeed, we saw greater interest in debt strategies in the first half of 2020.

Still, those investors seeking returns may be disappointed to year eVestment’s stats that show roughly 50% of funds are producing positive results in 2020, with the average gain among performance winners at 10.83% YTD through July. Interestingly the average YTD decline among those funds in the red is -10.98%, displaying a wide swing in manager return dispersion.

And they found that largest hedge funds in the industry were not immune from the performance woes with the 10 largest funds reporting below industry average returns.

The funds with $5 billion plus in capital within PivotalPath’s hedge fund universe saw YTD gains on average of 4.5%.

This data provider reports manager dispersion is on the decline from its all-time high from March. But much of the trend depends on strategy with managed futures and equity diversified manages seeing greater return dispersion in the third quarter.

Whether hedge funds are turning a corner broadly seems far from certain thanks to the far-reaching effects of the coronavirus pandemic.

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