Event driven managers fuel hedge funds’ January gains, as industry withstands GameStop pressure

GameStop

Event driven managers, particularly those running merger arbitrage and special situations strategies, powered hedge funds’ performance in January, as the industry overcame retail investor-driven stock volatility to finish the month in the black.

New data released by Hedge Fund Research on Monday shows hedge funds maintained 2020’s upward momentum into the new year - with HFR’s Fund Weighted Composite Index, which ended last year up almost 12 per cent, rising 0.92 per cent in January, and the investable HFRI 500 Fund Weighted Composite Index adding 0.35 per cent last month.

Event driven hedge funds climbed 2.81 per cent overall last month, and within the sector, merger arbitrage (up 4 per cent) and special situations funds (which climbed 3.80 per cent) fared best, HFR metrics show.

At the same time, credit arbitrage hedge funds rose 3.43 per cent, while managers running distressed and restructuring strategies advanced 2.59 per cent. Activist hedge funds were up just over 1 per cent, but multi-strategy event driven managers were marginally down at -0.18 per cent.

Commenting on the numbers, HFR president Kenneth Heinz explained how hedge funds effectively navigated the idiosyncratic stock trading volatility, which focused on deep value equities with high short interest, with such trends supporting gains in event driven strategies, which typically focus on inexpensive, out-of-favour companies undergoing fundamental, structural transition in the underlying businesses.

The Fund Weighted Composite index saw a broad dispersion among constituents’ performance, HFR noted, with the top decile of the HFRI rising 11.6 per cent, while the bottom decile fell 7.8 per cent in January.

“While certain sub-strategies declined in January, as is evidenced by the wide dispersion in performance, as a direct result of the size, breadth and diverse nature of hedge fund strategies, overall industry performance was positive for the month,” said Heinz.

Amid late January’s stock market volatility, driven by the GameStop/Reddit push, equity-focused hedge funds - as measured by HFR’s Equity Hedge (Total) benchmark - gained 0.78 per cent last month. Leading the way were energy and basic materials funds, which capitalised on rising commodities prices with a 4.83 per cent advance. Fundamental growth funds made 2.26 per cent in January, but a number of stockpicking strategies finished the month marginally in the red: technology-based long/short funds dropped 1.12 per cent, equity market neutral lost 0.53 per cent, and multi-strategy equity hedge funds fell 0.76 per cent.

Relative value hedge funds did better in January, with the fixed income-based HFRI Relative Value (Total) Index gaining 1.30 per cent on average. Here, gains were driven by yield alternatives-focused strategies, which rose 3.97 per cent, as fixed income asset-backed strategies climbed almost 2 per cent, and convertible arbitrage managers advanced 1.88 per cent.

Macro hedge funds endured a more mixed set of performances though. While discretionary thematic (1.75 per cent) and multi-strategy (1.10 per cent) managers notched up positive returns, active trading (-1.16 per cent), currency (-0.50 per cent) and systematic diversified (-0.29 per cent) strategies all stumbled in January.

“While significant financial market attention has been focused on a handful of funds and small number of equities impacted by these recent trading trends, the overall hedge fund industry is comprised of over 9,100 funds managing nearly USD3.6 trillion across a highly diverse range of strategies, which include significant capital exposure to out of favour, deep value equites,” Heinz said of January’s numbers.

“With an emphasis also on opportunistic positioning and sustained capital appreciation achieved through specialised long-short portfolio management, leading institutions are likely to continue expanding allocations to hedge funds as a tool for achieving their long-term portfolio objectives.”