Hedge funds posted the first monthly decline in five months in October, as uncertainty over the outcome and impact of US political elections and the ongoing European sovereign debt and banking crisis increased financial market volatility and further reduced investor risk tolerance.
The HFRI Fund Weighted Composite Index declined by 0.5 per cent, as positive performance across relative value arbitrage, equity hedge and event driven strategies were unable to offset declines across both discretionary and systematic macro strategies, according to data released by HFR.
Fixed income-based relative value arbitrage, event driven and equity hedge each posted their fifth consecutive month of gains, demonstrating effective tactical adjustment and risk hedging in an environment of declining US equities and rising fixed income yields. The HFRI Relative Value Arbitrage Index gained 0.6 per cent with top contributions from fixed income asset backed and volatility arbitrage exposures, which were complemented by FI: Corporate and Energy Infrastructure.
RVA strategies have posted gains in nine of the 10 months in 2012, and have posted gains in 38 of 45 months since the onset of the 2008 financial crisis. Fixed income asset backed is the top performing hedge fund strategy for 2012, gaining 14.4 per cent YTD. Investors have continued to allocate capital to relative value arbitrage strategies, which received USD35bn in inflows through the first three quarters of 2012.
Event-driven hedge funds posted a gain of 0.2 per cent in October, with gains in activist and distressed strategies offsetting declines in merger and credit arbitrage. The HFRI Equity Hedge Index also gained 0.2 per cent, with gains across long, short and market neutral exposures. The HFRI EH: Fundamental Value Index gained 0.5 per cent, while HFRI EH: Equity Market Neutral and HFRI EH: Short Bias indices gained 0.7 and 1.0 per cent, respectively.
The HFRI Macro Index declined 2.2 per cent in October, with losses across commodity-focused funds complemented by weakness across currency, fixed income and equity exposures; the monthly decline is the third consecutive loss for macro funds. The HFRI Macro Systematic Diversified Index posted a decline of 3.5 per cent, the second worst monthly performance for trend-following strategies since July 2008; systematic macro strategies experienced weakness concentrated in long fixed income exposure and variable US dollar exposure, as well as losses across gold, oil, metals and equities. The HFRI Emerging Markets Index gained 0.3 per cent with positive contributions from Latin America, the Middle East and Emerging Asia.
Fund of hedge funds posted their first decline since June, with the HFRI Fund of Funds Index falling by 0.5 per cent.
“Hedge fund performance in October reflected a definitive shift in investor sentiment from the beta-driven optimism over steady improvements in stagnant global economies to the realities, risk and uncertainly inherent in additional European banking stabilisation measures, US elections and the pending fiscal cliff,” says Kenneth J Heinz (pictured), president of HFR. “Fundamentally based arbitrage, event and equity strategies demonstrated effective hedging against and tactical adjustment to these dynamic changes, while trend following, quantitative macro strategies experienced weakness as a result of them. Under the expectations of elevated financial volatility through year end, hedge funds which have effectively demonstrated their ability to navigate this environment will continue to attract institutional investors.”