eVestment: 10th straight positive month

September, 2017

The hedge fund industry has produced its tenth consecutive month of aggregate gains in August, though leading strategies shifted a bit during the month, according to the latest Hedge Fund Performance Report [PDF] from eVestment.

A welcome sight for investors is an accelerating rebound from the largest managed futures products, and macro funds are also improving on what was a dismal Q2. Quantitative equity strategies outperformed in a generally mediocre developed equity environment, and long/short equity strategies continued to grind out positive performance. While we know month-to-month sentiment shifts are ultimately not what matters, for what was not a blow-out month for the industry, August’s returns felt like pretty good news.

Highlights

  • Hedge funds returned an average of +0.74% in August, and are +5.47% YTD in 2017.
  • Three-quarters of the industry is positive in 2017, and average gains are near 10%.
  • Emerging markets’ run of elevated outperformance continues, again led by Brazil in August.
  • The largest managed futures funds posted their best month in August since the BREXIT-dominated June 2016.

Hedge funds returned an average of +0.74% in August 2017. Year-to-date the industry is +5.47%, with three quarters of all strategies in positive territory. Equity exposure continued to support returns, while managed futures funds are rebounding.

Key points
Aggregate returns may under-represent opportunity available in hedge fund space in 2017. With 75% of products producing positive returns in 2017, and the average return from those products near 10%, aggregate returns near 5.5% are likely a poor universal representation of investor experience in 2017.

Despite strong headline returns, there is disruption among activists positions which continued in August. Aggregate returns from activists were negative in August, the first month since October 2016 when returns have been even close to negative territory. The universe is still the second best performing non-EM strategy in 2017, but only half of reporting activists were positive in August, and each fund which was negative in August, also produced losses in July.

Managed futures’ rebound accelerated in August, led by the largest funds. During a month where developed market equities were not among the best performing segments, where there were large moves in metals/energy commodity markets, and treasury/sovereign bond markets, managed futures products excelled. For large managed futures funds, August’s market shifts enabled their largest gains since June 2016, and the market shocking BREXIT vote. August’s returns move the largest managed futures funds back into aggregate positive territory for 2017.

Quantitative equity strategies excelled in developed markets’ mediocre month. Despite the relatively low returns for US and European markets in August, relative to their recent past, quant equity funds were able to produce outsized returns, perhaps aided by the spikes in volatility. Whatever the exact reason, that quant approaches were able to outperform provides further support for the approach.

Led Again by Brazil in August, EM Outperformance Continues into Eighth Month of 2017
Emerging market strategies again produced returns more than double that of developed market strategies in August, resulting in YTD returns that are nearly three times that of their developed market-focused peers.

Primary Regional Exposure
With two strong consecutive months of returns, Brazil exposure is creeping up on China and India as industry leading return generators. No other segment has outperformed exposure to Brazil in the last three months, and after leading the industry in 2016, Brazil-focused funds are within striking distance of 2017 China and India fund performance.

Economic Development
Emerging market skew supporting Latin America- and Hong Kong-domiciled funds’ industry outperformance. Firms domiciled in Asia have been generating superior aggregate returns in 2017, outperforming products offered by managers located in the UK, US, and continental Europe. The higher proportion of EM strategies in Asia and Latin America is the primary source of this outperformance.