HF alpha varied, yet still on the upswing along with AUM

Hedge funds may be willing to party like it’s 1999 or at the very least 1998, according to hedge fund performance tracking by industry-wide financial service providers. One such provider, PivotalPath, said it found that its hedge fund composite index added 0.1% last month as the S&P 500 index fell by 4.6%. The firm said its composite’s outperformance ranks in the top 10% of monthly relative performance since January 1998. For the year, the PivotalPath composite produced 8.2% in alpha relative to the S&P 500. Overall, PivotalPath’s index that tracks 2,400 hedge funds was up 7.4% for the year-to-date through September. Event-driven led the way last month with gains of 12.3% over the 12-month rolling period. “It’s difficult to predict where hedge funds will finish this year (or any year for that matter), but there are a couple of key data points that suggest hedge funds will continue to deliver,” said Jon Caplis, CEO and founder of PivotalPath. “It comes down to three key pieces of data: 1) strong alpha generation, 2) inflation could be beneficial to hedge funds and 3) continued diversification in risk factors and hedge fund performance.” A rising interest rate environment is a positive harbinger for hedge funds, according to Caplis. Also if inflation remains firmly in place, hedge funds are likely to do well on average. As the 10-year rate moves higher, the PivotalPath Composite return remains at 12.2% when rates are 3% or higher for the 10-year. By comparison returns sit at 7.8% when rates remain below 3%. “Given the recent move in the 10-year (interest rate), it’s not surprising that hedge funds can deliver in an inflationary environment, even one that generates negative equity performance as we saw in September, where the PivotalPath Composite was 0.2% vs. the S&P 500, which fell 4.6%. The rolling 12-month alpha of 8% annualized relative to the S&P 500 is a level Caplis said the industry hasn’t seen since 2010. Even with positive exposure to equity markets on average, hedge funds can perform if markets peak or move lower, he added. Equity managers faced the most difficult challenges of course in September, with TMT and healthcare sectors dragging down returns. Gains were logged though by multi-strategy (1.4%) and credit (1%). Yet on the equity side, there were some outliers. For instance, Richard Mashaal’s Senvest Partners is up 78% in 2021 through September. The contrarian, value strategy earlier in the year reportedly made profits on the Gamestop drama and was up 1.29% last month, according to figures from HSBC obtained by Alternatives Watch. Global equity long/short fund Trefoil Capital was up over 69% for the year through Oct. 1, according to HSBC. The firm’s Stylus fund employs a top-down thematic approach with a low net exposure that has consistently performed in 2021. The London-based manager typically aims for gains between 10%-30% per annum. Among more established institutional hedge fund firms, Odey Asset Management has had a stellar 2021, reportedly racking up more than 100% in gains through September in its flagship fund. According to HFR, the total hedge fund industry grew in the third quarter with $5.6 billion in industry inflows, which means alongside marginal performance-based gains, total hedge fund capital rose to $3.97 trillion – representing asset growth of nearly $370 billion since the beginning of 2021. The HFRI Fund Weighted Composite Index was virtually unchanged in the third quarter, falling only -0.3% for the quarter, which follows the strongest first half of a calendar year since 1999 and the fifth strongest first half return since index inception. The investable HFRI 500 Fund Weighted Composite Index has surged 9.11 % year-to-date 2021 through September Interest-rate sensitive relative value arbitrage strategies led both performance and inflows for the quarter, according to Kenneth Heinz, president of HFR. “Looking to the year ahead, managers and investors have increased their respective focus on portfolio credit and interest-rate sensitivity, tactical commodity exposures and equity market exposures, with implied optionality and flexibility to adjust to a fluid macroeconomic environment and market conditions,” added Heinz. “Funds effectively positioned to navigate these multi-asset trends are likely to lead industry performance and growth into the new year.” Lastly, looking at how confident hedge fund managers themselves are for potential growth, the indicators also remain strong. The Hedge fund Confidence Index compiled by Seward & Kissel, Simmons and Simmons and AIMA, and a measure of economic prospects for hedge funds in the coming 12 months, found that nearly all 99% of hedge funds are confident about their businesses in the third quarter. Officials noted that after a long period of fairly modest performance across the hedge fund industry compared to major market indices, the past year has seen increasing levels of confidence. Year-to-date hedge funds are averaging double digit returns net of fees, with the mood across the industry being buoyed by positive net inflows, the groups' report noted. Prospects they say for the hedge fund industry are as strong as they have been in over a decade.

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HF alpha varied, yet still on the upswing along with AUM

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