Hedge funds stumble in September, as stormy markets bring five-month surge to an end

Stormy seas

Hedge funds have suffered their first monthly loss since March, as fears over the growing spread of coronavirus in Europe and the US – combined with the imminent presidential election and uncertainty over the US economy – weighed down on managers of all hues in a decidedly patchy September.

New data published by Hedge Fund Research shows that only event driven strategies emerged from September in positive territory, as losses swept through the equity, macro and relative value sub-sectors.

The flagship HFRI Fund Weighted Composite Index – an across-the-board snapshot of all strategies - dumped 1.2 per cent last month, its first monthly decline since March, when markets were sent spiralling by the Covid-19 outbreak. 

The index’s Q2 surge of 9.14 per cent was essentially halved during the following quarter, with the index gaining some 4.06 per cent between July and September.  The end of its five-month positive run last month has left the index flat for the year, at 0.5 per cent.

The HFRI Equity Hedge (Total) Index – which measures the performance of a broad range of equity-focused managers – gave back 1.53 per cent in September.

Only healthcare-focused equity hedge funds were up last month, rising 1.94 per cent, with fundamental equity, multi-strategy, quantitative and energy/materials strategies all registering losses.

Overall, HFR’s equity benchmark remains up 2.24 per cent since the start of 2020.

In contrast, event driven hedge funds – which include a range of activist, distressed, special situations and arbitrage strategies – fared better in September, enjoying a 0.27 per cent advance. Credit arbitrage funds added 1.92 per cent, while managers running merger arbitrage strategies climbed 1.65 per cent. But the HFRI Event-Driven (Total) Index is still in the red by 2.15 per cent year-to-date.

Macro funds dropped 2.09 per cent last month, taking a chunk out of their year-to-date performance which now rests at 0.30 per cent. Systematic diversified strategies took a bruising 2.96 per cent hit, with discretionary thematic and multi-strategy macro managers’ recording losses approaching 2 per cent.

Meanwhile, HFR’s emerging markets barometer remains up 1.09 per cent year-to-date, despite sliding 1.36 per cent last month. Relative value strategies lost more than 2 per cent in the nine-month period since the start of January, having dropped 0.20 per cent in September.

The investable HFRI 500 Fund Weighted Composite Index slipped 0.95 per cent for the month, with its year-to-date gain now at 0.4 per cent.

Despite September’s slide, HFR president Kenneth Heinz said the industry has shown “powerful financial market leadership” this year, outflanking global stock markets to leave it well placed to continue to attract institutional money into next year.

“Led by event driven and fixed income-based relative value strategies, hedge funds effectively navigated a volatile September, outperforming global equity market declines driven by additional virus contagion and upcoming US election uncertainty, with outperformance in healthcare, merger arbitrage, volatility, and credit multi-strategies,” Heinz said.

“As has been the case throughout 2020 and as to be expected into 2021, managers remain positioned with opportunistic, tactical flexibility, adjusting exposures to preserve capital in risk-off environments, while aggressively positioning as liquidity providers to benefit from opportunities created by dynamic and fluid shifts in the macroeconomic and geopolitical trends.”