Hedge funds posted gains to conclude the volatile month of December, led by contributions from CTAs, Technology and Shareholder Activist strategies, according to HFR.
The broad-based HFRI Fund Weighted Composite Index gained +0.3 per cent in December, navigating a sharp decline in Oil, Russian- and Euro-centric macro/currency uncertainty and equity volatility across both Emerging and Developed markets. The HFRI Fund Weighted Composite Index advanced +3.6 per cent for 2014, below the long-term average hedge fund industry performance of +10.7 percent, as hedge fund managers maintained conservative exposures with equity markets near record highs.
Reversing underperformance in prior years, hedge fund strategy gains were led by Macro strategies, with the HFRI Macro (Total) Index up +1.0 per cent for the month and +6.4 per cent for 2014; Macro funds had posted three consecutive calendar year declines. Macro strategies were led by Quantitative, Systematic Diversified CTA strategies, with the HFRI Macro: Systematic Diversified/CTA Index gaining +1.5 per cent in December to complete a gain of +11.2 per cent for 2014, leading all hedge fund strategies. CTAs posted strong gains in the second half of the year, benefitting from trending behavior in Oil, Energy Commodities and Currencies, climbing +11.0 per cent in 2H14, while the HFRI Macro (Total) Index was up +5.3 per cent in 2H14. The HFRI Macro: Currency Index gained +1.8 per cent in December and +4.2 per cent for 2014; the Index was slightly negative for 1H14 but advanced +5.4 per cent in 2H.
Fixed income-based Relative Value Arbitrage strategies posted a narrow decline in December to conclude its sixth consecutive year of positive performance. The HFRI Relative Value Arbitrage Index declined -0.02 per cent in December, though gained +4.5 per cent for 2014, trailing last year’s gain of +7.1 per cent. Since the Financial Crisis in 2008, HFRI RVA has posted annualised returns of +9.8 per cent on a volatility of 3.6 percent. Displaying characteristic steady performance, RVA has posted only a single calendar year decline (2008) in 24 years since Index inception in 1990. RVA gains in December were led by HFRI RV: Convertible Arbitrage Index, which advanced +1.1 per cent, and HFRI RV: Volatilty Index, which climbed +0.6 per cent in December. For FY 2014, HFRI RVA: Yield Alternative Index led RV performance, gaining +10.4 per cent for the year.
Event Driven strategies also posted a narrow decline for December, with gains from Activist sub-strategies offset by declines in Distressed exposures. The HFRI Event Driven Index declined -0.08 per cent for December to conclude 2014 with a gain of +1.1 percent, the lowest performance since the Index declined -3.3 per cent in 2011. The HFRI Activist Index climbed +2.5 per cent in December, recovering from sharp declines in September and October to post a gain of +4.8 per cent for 2014, leading all ED sub-strategies. Offsetting these, the HFRI Distressed Index fell by -1.4 per cent in December as credit and liquidity weakened, contributing to a decline of -1.1 per cent for 2014, the worst performance since the Index declined -1.8 per cent in 2011.
The HFRI Equity Hedge Index posted a gain of +0.04 per cent in December, bringing full year 2014 performance to a gain of +2.3 percent. Equity Hedge performance was led by Technology and Healthcare funds, with the HFRI EH: Technology Healthcare Index gaining +2.3 for December and +9.9 per cent for 2014. Quantitative equity strategies posted gains through 4Q14 volatility, with HFRI EH: Quantitative Directional and HFRI Equity Market Neutral Indices gaining +5.5 and +3.9 percent, respectively for 2014. Partially offsetting these gains, hedge funds in Energy/Basic Materials and Emerging Markets ended the year with declines for 2014; the HFRI EH: Energy/Basic Materials Index posted a narrow decline of -0.01 per cent in December and -4.8 per cent for 2014, concluding the year with a drawdown of -13.2 per cent over the final four months. The HFRI Emerging Markets Index declined -2.1 per cent for December and -2.3 per cent for 2014, with recent losses concentrated in Russia offsetting gains in China. The HFRI EM: Russia Index posted a sharp loss of -7.0 per cent in December and -24.9 per cent for 2014; the HFRI EM: China Index gained +2.6 per cent in December and +6.3 per cent for 2014.
“Hedge funds concluded 2014 with continuation and re-establishment of two powerful trends that defined much of the year – Macro/CTA trend-following gains in long US Dollar and short Oil positions, and Shareholder Activist/Event Driven investing, effectively recovering from the volatility spike in event equities in early 4Q14,” says Kenneth J Heinz, President of HFR. “Both of these trends are positioned for acceleration into 2015, driven by the US-led global recovery, low global inflation, renewed Euro currency macroeconomic risks and continued equity and fixed income market volatility. Hedge funds and investors in these strategies are likely to benefit from the re-normalization of the US economy in 1H15, maintaining tactical flexibility in exposures across asset classes to capture directional and non-directional opportunities which emerge from the fluid and evolving financial market environment.”
