Hedge fund performance mirrors 2008 crisis

Hedge funds continued to perform better than overall equity markets in March, as stock markets in the US and Europe saw their most severe decline since 1987.

The average hedge fund, as represented by the Eurekahedge Hedge Fund Index, was down 4.4% in March, compared with underlying stock markets such as the MSCI ACWI IMI (Local) which lost 14% during the same period.

The lockdown measures in more than 100 countries in response to the coronavirus pandemic prompted a free fall in equities, with the Dow Jones Industrial Average losing 13.74% and S&P 500 dropping 12.51%. In Europe, the French CAC40 was down 18.01%, while Germany’s DAX plummeted 16.44% in March.

However, in China, where lockdown measures are gradually eased, stock markets like the Shenzhen and Shanghai Composite indices were down only 7.54% and 4.51%, respectively.

In this environment, US-focussed fund managers were down only 3.48%, despite the relative underperformance of the region’s underlying equity markets, data provider Eurekahedge reported. US managers topped their peers focussed on Asia, excluding Japan, and Europe, who were down 7.37% and 5.77% respectively, over the month.

About 32% of the underlying constituents of the Eurekahedge Hedge Fund Index posted positive returns in March, and 33.2% of the hedge fund managers in the database were up over the first three months of 2020.

More than 80% of the hedge fund managers were able to outperform the global equity market during the month, as hedge funds responded well to the highest levels of volatility since the 2008 financial crisis.

The monthly hedge fund performance distribution mirrored that of October 2008.

The top 10% of the hedge fund managers tracked by Eurekahedge gained 6.88% in March. The bottom 10% funds lost 19.32%. This dispersion of hedge fund performance mirrored that of the last crisis, in October 2008.

In terms of investment strategies, long volatility-focussed strategies, CTA/managed futures and AI hedge funds topped the first-quarter performance, whereas equity long-biased hedge funds lost nearly 20%.

In the first quarter of the year, the global hedge fund industry’s assets under management declined by almost US$110 billion, based on preliminary Eurekahedge estimates for March.

While performance-driven losses far for the year amount US$70 billion, investors have redeemed about US$40 billion, the data provider said.

Kenneth J. Heinz, president of Hedge Fund Research, another hedge fund data provider, said “uncorrelated, defensively and long volatility-positioned hedge fund strategies posted impressive, negatively-correlated gains for the month, while directional equity-sensitive, long-biased, and arbitrage strategies posted sharp declines”.

He stated that March and the first quarter of 2020 reflected the sharp and volatile reversal of the risk-on environment which dominated 2019. This underscored the importance of maintaining a diversified alternatives portfolio.

In the fourth quarter of last year new fund launches continued a declining trend, with a total of only 89 funds, the lowest quarterly level since 2008. The 480 new funds launched in total last year were the lowest level since 2000, HFR reported.

During the year, an estimated 738 funds liquidated, exceeding the 2018 total of 659 liquidations, but slightly below the 2017 total of 784 liquidations.

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