Hedge funds fend off election uncertainty and coronavirus spikes to finish October in positive territory

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Hedge funds have notched up positive returns in recent weeks, positioning around the investment uncertainty surrounding the US presidential election and fresh Covid-19 lockdowns with gains inversely correlated to the sharp stock market declines seen at the end of October.

New data from Hedge Fund Research shows the industry as a whole was up 0.4 per cent last month, which took the HFRI Fund Weighted Composite Index’s year-to-date performance to 1.2 per cent.

As governments reimposed lockdowns in a bid to contain a renewed increase in coronavirus cases in many countries, HFR president Kenneth Heinz described October’s performance as “impressive”.

Equity-based hedge fund managers added 0.90 per cent during October, which took the HFRI Equity Hedge Total Index’s year-to-date returns to 3.45 per cent. 

All but one equity sub-strategy notched up positive returns last month, with quantitative directional funds dropping 0.85 per cent, as healthcare (up 2.95 per cent), energy and basic materials (1.70 per cent) and multi-strategy (1.38 per cent) drove gains. Healthcare hedge funds are now up almost 13 per cent since the start of 2020, with tech-focused managers – which added 0.36 per cent in October – up more than 17 per cent year-to-date.

Equity hedge funds’ performance was inversely correlated to October’s global stock market declines, HFRI said, with the investable HFRI 500 Index rising 0.3 per cent, outflanking the Dow Jones Industrial Average by nearly 500 basis points, and the DAX Index by over 1000 bps.

Elsewhere, event driven hedge funds rose 0.49 per cent in October – but they remain down 1.58 per cent over the 10-month period in 2020.

Amid growing expectations for more corporate transaction activity heading into 2021, merger arbitrage managers gained 1.88 per cent for the month. Multi-strategy event driven funds grew 1.69 per cent, and distressed funds also advanced 1.10 per cent, but activist managers lost 1.49 per cent.

Meanwhile, macro-based hedge fund strategies grappled with mixed performances, as macroeconomic and geopolitical uncertainty in the run-up to this month’s US presidential election ultimately made for a tricky investment environment.

Overall, the HFRI Macro Total Index lost 0.70 per cent in October and remains 0.23 per cent in the red for the year. Only commodities-focused managers took profits last month, generating a 2.04 per cent gain to put their YTD return at more than 5 per cent. Currency funds were down 2.62 per cent and systematic diversified strategies lost more than 1 per cent, with the latter’s year-to-date losses at close to 4 per cent.

Discretionary thematic macro hedge funds remain up 6.21 per cent year-to-date, despite dipping slightly at -0.16 per cent in October.

Finally, the HFRI Relative Value Total Index advanced 0.48 per cent in October, but is down 1.33 per cent year-to-date. Fixed income convertible arbitrage managers led the way, rising 1.14 per cent for the month, bringing their 10-month returns since the start of 2020 to almost 7 per cent.

“Institutional investors continue to strategically increase allocations to hedge funds, driving capital inflows in Q3, with these positioning not only for an uncertain geopolitical environment resulting from the US election, the indeterminate path of the coronavirus, and the corresponding economic impact, but also for the prospect of a global economic recovery into 2021,” Heinz said.

“Strong, defensive industry performance throughout the 2020 volatility is likely to provide powerful momentum driving industry growth and expansion in early 2021.”