Hedge funds posted strong gains in January as the resolution of the US fiscal cliff and investor optimism regarding the European banking and sovereign debt crisis drove gains across all hedge fund strategies to begin 2013, according to data released by HFR.
The HFRI Fund Weighted Composite Index rose by 2.8 per cent, the seventh gain in the last eight months and the strongest monthly gain since January 2012.
Fund of hedge funds gained 2.5 per cent, their third consecutive gain and sixth in last seven months.
Equity hedge led all strategies as global equity markets rallied across nearly all regions, with the HFRI Equity Hedge Index gaining 3.7 per cent for January. Gains were also distributed broadly across fundamental value, growth and quantitative directional strategies, with these returning +4.5, +3.8 and +3.8 per cent, respectively. Short-selling strategies were the lone sub-strategy to decline in January, losing 3.7 per cent.
Fixed income-based relative value arbitrage (RVA), the leading area of strategy performance in 2012, extended recent gains as the HFRI Relative Value Index gained 2.5 per cent in January, the strongest monthly gain since September 2010. Significantly, RVA gains also occurred through an environment of increasing yields in most developed markets globally. Event driven (ED) strategies also posted strong gains as activist positioning in Herbalife and other dynamic M&A situations contributed to performance, with the HFRI Event Driven Index advancing 2.2 per cent, the eighth consecutive monthly gain for the index and the strongest month since January 2012.
Currency volume soared in January in response to catalysts of inflation targeting by the Bank of Japan and falling sovereign yields across Italy, Spain and Greece driving the Euro to a 14-month high against the US dollar. The HFRI Macro Index gained 1.6 per cent, only the second monthly gain in last six months and the strongest gain since April 2011, with positive contributions across quantitative, discretionary, commodity, currency and emerging markets exposures. The HFRI Macro Systematic Diversified/CTA Index gained 1.9 per cent, improving on a disappointing decline of 2.5 per cent for 2012, while the HFRI Emerging Markets Index gained 3.4 per cent, improving on last year’s gain of 10.3 per cent.
“Hedge fund performance in January reflects an important shift in the driver of financial market performance from the macro and political uncertainty which dominated 2012 to fundamentally driven, mean-reverting factors including growth, earnings and relative valuation,” says Kenneth J Heinz, president of HFR. “Macro risks have been reduced, but not eliminated, creating a compelling environment for hedge fund performance as investors remain sensitive to these risks, but are also increasing opportunistic with regard to positioning and performance generation. This shift toward fundamentals and increasing risk tolerance is likely to provide a powerful catalyst to hedge fund performance in 2013.”