Hedge funds marginally outperform market

Jan 16, 2019
Defensive macro among hedge funds posting gains in volatile 2018 markets

Hedge funds marginally outperformed the market last year, posting a 4.07 percent annual loss versus the S&P’s 4.38 percent fall, according to data from Chicago-based Hedge Fund Research (HFR).

The last time hedge funds beat the market was during the financial crisis.

The HFRI Fund Weighted Composite (FWC) Index – constructed to capture the breadth of hedge fund performance trends – fell 1.97 percent in December, topping US equities and most global and regional equity indexes by more than 700 basis points, marking the largest monthly outperformance since February 2009.

HFR notes 93 percent of HFRI constituents outperformed the S&P 500 in December, which posted a negative return (including dividends) of 9.03 percent that month.

Led by larger macro hedge funds and credit multi-strategy funds, the HFRI Asset Weighted Composite (AWC) Index – which comprises more than 1,500 single-manager funds – declined by only 0.68 percent in December, also topping the decline in US equities, which fell by between 8.5 percent and 12 percent in the month.

The HFRI AWC Index also posted a narrow decline of 0.8 percent for the full year of 2018. Driven by strong December performance, both the HFRI FWC and AWC indices outperformed US and global equities for 2018, the strongest outperformance of equity markets for a calendar year since 2008.

Defensive macro hedge funds and quantitative, trend-following commodity trading adviser (CTA) strategies – which use futures contracts – even posted gains during December.

One of the top performers was the world’s largest hedge fund, Bridgewater, with its flagship Pure Alpha Fund finishing the year with a gain of 14.6 percent. Renaissance Technologies’ RIDGE Fund gained more than 10 percent last year, while its equities fund surged 8.5 percent.

There were also big losers, however. All-star manager David Einhorn ended his worst year since he founded Greenlight Capital in 1996, with his main fund hemorrhaging 34 percent. Another billionaire manager who struggled in 2018 was Dan Loeb: his Third Point firm lost 6 percent in December alone, bringing its yearly loss to about 11 percent.

For the hedge fund industry overall, the December results, represent a ‘milestone,’ says Kenneth Heinz, president of HFR, in a statement: ‘The HFRI is exhibiting the highest level of outperformance of steep equity market losses in nearly a decade, with certain strategies posting positive performance through the worst equity market decline since February 2009.

‘Macro funds, highlighted by trend-following CTA strategies, demonstrated their integral contribution to institutional portfolio composition, and drove strategy and asset-weighted performance industry-wide. December gains and defensive outperformance are likely to not only fundamentally change the context of hedge fund performance in 2018, but also attract investor capital in the expectation of these volatile, powerful trends continuing through 2019.’

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