Hedge Funds Protect Wealth Despite Having Their Worst Month Since March 2020

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Hedge funds were in the red for November, but they protected wealth, with the average hedge fund declining less than major stock market indices. However, PivotalPath reports that they had their worst month since the depths of the pandemic in March 2020.

Hedge funds struck by volatility

With Intelligence’s Eurekahedge Hedge Fund Index fell 1.14% last month, outperforming the MSCI ACWI Local Index, which declined 2.03%. Other sources are putting the hedge fund decline slightly lower, with PivotalPath reporting a 1.6% to 2% decline. That marks the worst performance for hedge funds since March 2020.

Year to date, the Eurekahedge Hedge Fund Index is up 8.36%. On an asset-weighted basis, the Eurekahedge index fell 1.77% last month and is up just 2.46% year to date, demonstrating the challenges faced by some of the largest fund managers this year.

Global equities were hit with significant levels of uncertainty last month as the Omicron variant of COVID-19, which is more contagious than previous variants, weighed on risk sentiment. Investors started to worry that the economic recovery could be derailed as some countries reimposed lockdowns.

Meanwhile, the Federal Reserve said it no longer sees inflation as transitory and plans to cut back on its quantitative easing much more quickly than originally planned. Due to all this uncertainty, the CBOE VIX surged 67.22%e last month, weighing on the performance of global equities.

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The Dow Jones Industrial Average fell 3.73% in November, while the S&P 500 was off 0.83%, bringing their year-to-date returns to 12.67% and 21.59%, respectively. European stock indices were also in the red for November, with the Euro Stoxx 50 falling 4.41% and the DAX down 3.75%.

November brought a reversal in investor flows and performance

Final asset flow numbers for October show performance-driven gains of $20.9 billion and investor inflows of $8.6 billion. Preliminary November numbers indicate a reversal: $15.9 billion in performance-based losses and $19.4 billion in investor outflows.

The global hedge fund industry had $2.4 trillion in assets under management as of last month after $94.6 billion in performance-driven gains and $64.9 billion in investor inflows so far this year. On a side note, Preqin reported earlier this month that hedge funds are on track for inflows this year for the first time in three years.

The firm reported $40.9 billion in inflows for the first nine months of the year, compared to outflows of $97.2 billion and $44.5 billion in 2019 and 2020, respectively.

Performance by strategy

Long/ short equities fund managers had the worst performance in November with $8.5 billion in performance-driven losses and investor outflows of $15 billion. The dismal performance of global equities weighed heavily on the strategy’s performance last month.

On the other hand, relative value fund managers had the best performance in November with $200 million in performance-based gains and $400 million in net investor outflows. Despite their negative performance-based return, CTA/ managed futures fund managers had the most investor inflows by far. Arbitrage was the only other hedge fund strategy to record investor inflows in November.

Year to date, long/ short equities and multi-strategy hedge funds had the best performances with $27.9 billion and $18.4 billion in performance-based gains, respectively. However, long/ short equities had the highest net outflows of all the strategies. Macro, distressed debt and other hedge funds are also in the red for investor flows year to date. Arbitrage and multi-strategy funds had the largest inflows of $31.1 billion and $19 billion, respectively.

Of note, crypto hedge funds outperformed bitcoin in November. The Eurekahedge Crypto-Currency Hedge Fund Index declined 2.37% last month, compared to Bitcoin’s 6.52% decline. Year to date, crypto hedge funds are up 171.11%, compared to bitcoin’s 101.03% return for the first 11 months of the year.

Long-only hedge funds lead the way

Long-only hedge funds have done exceptionally well this year. The Eurekahedge Long-Only Absolute Return Fund Index gained 13.02% for the first 10 months of the year, outperforming other hedge funds and funds of funds, which gained 9.59% and 9.42%, respectively.

While November brought significant volatility, as already mentioned, long-bias hedge funds still returned 10.4% through November, demonstrating that the challenging month didn’t detract much from their return.

Eurekahedge notes that last year’s performance for long-only hedge funds was rocky but outstanding. They plummeted 21.12% during the first quarter as news of the pandemic hit, hammering global equities. The World Health Organization later declared COVID-19 to be a pandemic, and the world’s governments imposed lockdowns, forcing non-essential businesses to close for an extended period.

The Fed slashed benchmark interest rates to zero and restarted quantitative easing. As a result, the global equity markets staged a massive rebound off the bottom in March 2020, giving long-only absolute return hedge funds a boost in the process.

Hedge funds following the strategy returned 43.17% between April and December 2020, allowing them to recoup all their first-quarter losses and end the year in the green with an attractive double-digit return of 12.91% despite the pandemic.

Maintaining momentum

Long-only absolute return hedge funds maintained their positive momentum going into this year. The Eurekahedge Long-Only Absolute Return Hedge Fund Index has now generated eight months of positive returns this year. July and September were the only negative months with returns of -0.94% and -1.47%, respectively.

“The combination of strong fiscal support, accommodative monetary policy and high COVID-19 vaccination rates has enabled the gradual reopening of economies and strengthened the momentum of the global economic recovery,” the report states. “This led to a boost in investor risk-on sentiment which supported the performance of global equity markets and benefitted long-only absolute return hedge funds.”

Assets under management by long-only absolute return funds globally have now surpassed pre-pandemic levels, rising to $268.7 billion after adding $8.6 billion during the first 10 months of this year. The strategy recorded $10 billion in performance-driven gains this year, which was partially offset by $1.4 billion in net investor outflows.

Last year, long-only hedge funds racked up $11.8 billion in performance-driven gains, which was partially offset by $6.8 billion in net investor outflows to add $5 billion to the strategy’s assets under management.

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