The hedge fund industry produced an aggregate return of -0.77 per cent in December. The decline was the industry’s fifth negative month in the second half of 2015 and eighth of the year, according to eVestment’s latest Hedge Fund Performance report.
Aggregate industry returns were negative in 2015 for only the third time on record at -2.01 per cent.
Despite overall industry returns being negative in 2015, the distribution of returns across funds was nearly even in terms of the availability of positive vs. negative annual performance (49 per cent positive, 51 per cent negative). The average positive return was 8.12 per cent and the average negative return was -9.87 per cent. The implication being that within many universes, good relative performance was available, providing investors could determine what processes could work in difficult times.
Managed futures funds ended 2015 with negative aggregate returns, -2.66 per cent. This was the universe’s fourth annual aggregate decline in five years. December was the sixth consecutive month where MFs strategies, particularly larger funds, produced returns directionally different than the prior month, with elevated volatility. Outside of emerging market exposure, only activist hedge funds produced more volatile returns in H2 than large MF strategies. The group produced excellent returns during the strongest portion of the USD rise which peaked in March 2015. Losses have averaged near 4 per cent during this volatile stretch since.
In term of availability of positive returns, the MFs space was mixed between large and small funds. Large funds, those with AUM >USD1 billion, were positive in 2015, +2.55 per cent. Selecting a large MFs fund at random would have given investors a nearly 70 per cent chance of positive returns in 2015. The average positive return from large MFs funds was +6.04 per cent in 2015. Conversely, selecting a small MFs fund had greater upside potential, but greater risk of loss. Only 40 per cent of small MFs products were positive in 2015, but average positive returns were +9.86 per cent.
Credit hedge funds posted their 8th aggregate decline of 2015, in December. The average return was -0.94 per cent during the month with the largest declines coming from exposure to energy and distressed assets.
Distressed funds had a very difficult Q4, falling -4.58 per cent and ended 2015 -8.75 per cent, the sector’s second worst year on record behind 2008. Only 1⁄4 of the distressed universe was able to produce positive returns in 2015. Average losses outpaced average gains -10.69 per cent vs. +7.70 per cent.
Market neutral equity funds (MNEq) were a bright spot for the industry in 2015. Average returns were only +2.60 per cent, but 62 per cent of funds were positive and performance was skewed more positive than most. The average MNEq fund gain in 2015 was +8.17 per cent vs. an average decline of -5.51 per cent.
2015 ended with emerging market hedge funds producing a positive Q4, despite a half-percent decline in December The +1.80 per cent rise in Q4 follows a -10.50 per cent decline in Q3, the universe’s largest quarterly loss since 2011. December’s decline came as a result of more losses from Brazil-focused funds and a commodity-driven equity market sell-off in Russia.
Despite the December decline, Russia and then China ended 2015 as two of the most profitable segments of the hedge fund industry in 2015. For Russia-focused funds, the average gain of +9.06 per cent did not come close to erasing 2014’s massive -40.77 per cent decline. For China-focused funds, the year’s gains followed similar gains in 2014, but have also preceded what has likely been a very difficult start to 2016.
Regional, or country-specific exposure in general was a source of excess returns for hedge funds in 2015. Funds who were able to avoid the pitfalls within Brazil and Africa/Middle East could have had an excellent year. However, only 42 per cent of EM products were positive in 2015 and average losses outpaced gains -15.17 per cent to 10.87 per cent.
