Hedge funds enjoyed a good rally of positive performance until October found them again in negative territory, with the majority of the prevailing strategies failing to exploitthe existing opportunities created from post-Brexit and pre-US Elections market movements. The two most anticipated political events this year are over and investors are reviewing their strategies, as in both cases we experienced an “unexpected” outcome. Trump’s victory caused anxiety in global markets, but Wall Street offset the panic and helped the markets close with a positive sign. U.S. dollar proved strong against most of the currencies and especially against Japanese Yen, but pushed the Mexican Peso into a big increase against dollar.
The biggest winners from the elections, though, are gold and bitcoin, which constitute the safe haven for investors, especially after Trump’s plans to control the dollar outflows combined with his anti-immigrant political position. This was further supported by the fact that Bitcoin’s price surged with the majority of the transactions being in U.S. dollar. Bitcoin reached $737 and now it stabilised around $712, underlining the rise of bitcoin both as an alpha pursuing strategy and as a means of exchange The outcome of U.S. elections is signalling the dawn of a new era with most investors expecting U.S. to boost spending in infrastructure and deregulation. Hedge funds find themselves in “reds” with all the major strategies losing on their bets and confirming the difficult year they are having to profit from such events.
The biggest losers are CTAs which found themselves in bad positioning after the spike in US and German bond yields, as the change in price direction hurt them. Event-driven and equity strategies followed them after failing to predict the elections’ outcome and to position themselves accordingly. We recognise that smaller hedge fund managers offer the top performing strategies during 2016 so far, compared to large scale and established managers, which are fighting to breakeven this year.
On the private assets side, there is a similar effect with new GPs outperforming established managers. European private debt is slowing down with the fundraising not increasing for the first time since 2010, which can be merely explained by the uncertainty caused by Brexit. There are a lot of opportunities in the middle market area where the banks cannot do business any more, and we will not be surprised to see more funds in the market soon as the market matures. Private equity is also expected to grow with buyouts and secondaries being the most popular strategies as new opportunities arise with the change of regulations especially in the U.S.