Stars were aligned for hedge funds in January, with most strategies ending in the black. The year starts with strong alpha generation and outperformance against major equity indices: the Lyxor HFI Index is up by 1.4% since 1 January, versus -1.2% for the MSCI World. Moreover, we have witnessed above average dispersion between managers. More than 10% of the hedge funds we monitor are close or above the 5% mark YTD. Using risk-adjusted metrics by strategy over a longer term horizon (below), the past 12 months suggest that L/S Equity, in addition to CTAs, has outperformed risk assets.
Head of Research – Managed Account Platform
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Stars were aligned for hedge funds in January, with most strategies ending in the black. The year starts with strong alpha generation and outperformance against major equity indices: the Lyxor HFI Index is up by 1.4% since 1 January, versus -1.2% for the MSCI World. Moreover, we have witnessed above average dispersion between managers. More than 10% of the hedge funds we monitor are close or above the 5% mark YTD. Using risk-adjusted metrics by strategy over a longer term horizon (below), the past 12 months suggest that L/S Equity, in addition to CTAs, has outperformed risk assets.
Diversification played out very nicely in January, as a large chunk of the alpha generated by hedge funds can be explained by their positioning on FX and fixed income markets. This came mostly from CTA and Global Macro managers, which outperformed other strategies. Only the credit asset class has detracted year to date, as U.S. high yield has suffered from the drop in oil prices. In terms of sector positioning, results are a bit more mixed but positive overall: L/S Equity funds were very nimble in adapting to the swings we experienced early this year and in capturing the drop in oil prices on equity markets. However, whilst Event- Driven funds rebounded last week, they struggled on their energy and financials positioning, especially on special situations trades. The Lyxor Event Driven Broad Index is down 0.4% in January but the outlook remains positive.
The long awaited ECB QE last Thursday was clearly one of the drivers of performance. It triggered a rally in European equities and a spread tightening in the periphery. The EURUSD also lost 1.5%. As described in our latest weekly brief, hedge funds were aggressively positioned to benefit from the ECB’s announcement, and most had anticipated that Mario Draghi needed to move fast and in size. The weakness in European inflation and growth was one of the main themes for hedge fund managers in 2014, and while systematic managers are still ahead of the crowd, discretionary managers are making up part of the gap as fundamentals start to matter again, and economic divergences between countries continue to widen.
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