Hedge funds advanced in December to conclude a strong year dominated by uncertainty and high volatility, as managers navigated the dual challenges of increasing interest rates and inflation, as well as the impacts of the second year of the global coronavirus pandemic.
Hedge funds advanced in December to conclude a strong year dominated by uncertainty and high volatility, as managers navigated the dual challenges of increasing interest rates and inflation, as well as the impacts of the second year of the global coronavirus pandemic.
The investable HFRI 500 Fund Weighted Composite Index gained +0.9 per cent in December, reversing the prior month’s decline, while the HFRI Fund Weighted Composite Index (FWC) advanced +1.3 per cent, according to data released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry.
For the full year 2021, the HFRI FWC gained +10.3 per cent, narrowly trailing the prior year’s gain of +11.8 per cent but marking the 3rd highest calendar year performance since 2009.
Funds investing in Cryptocurrencies soared again to lead all hedge funds in 2021, with the HFR Cryptocurrency Index surging +215 per cent, topping the 2020 return of +193 per cent.
The performance dispersion of the underlying HFRI index constituents narrowed in December, with the top decile of the HFRI gaining an average of +6.6 per cent, while the bottom decile declined by an average of -3.5 per cent for the month, representing a top-bottom dispersion of 10.1 per cent for the month, compared to a top-bottom dispersion of 19.1 per cent in November. For the full year 2021, the top decile of the HFRI soared by an average of +45.6 per cent, while the bottom decile declined by an average of -12.3 per cent.
Equity Hedge funds, which invest long and short across specialized sub-strategies, led industry strategy gains in December and reversed the prior month’s decline, as global equities traded in wide intra-month range but recovered from an intra-month decline driven by fears of the spreading of the Omicron coronavirus variant. The investable HFRI 500 Equity Hedge Index gained +1.7 per cent for the month, bringing the full year 2021 performance to +11.9 per cent, while the HFRI Equity Hedge (Total) Index advanced +1.85 per cent, led by gains in Healthcare and Fundamental Value exposures. The HFRI EH: Healthcare Index surged +3.9 per cent while the HFRI Fundamental Value Index added +2.4 per cent for the month. For the full year 2021, EH performance was led by the HFRI EH: Energy/Basic Materials Index which jumped +26.2 per cent.
Event-Driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, also gained in December, driven by Activist and Special Situations strategies. The investable HFRI 500 Event-Driven Index gained +1.3 per cent, while the HFRI Event-Driven (Total) Index advanced +1.8 per cent for the month, bringing full year 2021 performance to +13.1 per cent, the highest performance since 2009. ED sub-strategy gains were led by the HFRI ED: Activist Index, which advanced +5.1 per cent in December, and the HFRI ED: Special Situations Index, which added +2.6 per cent, with both reversing the prior month’s decline. For the full year 2021, ED performance was led by the HFRI ED: Activist Index, which jumped +18.8 per cent.
Fixed income-based, interest rate-sensitive strategies also advanced for the month, as interest rates increased and managers continued to position for the near-term tapering on bond purchases by the US Federal Reserve. The investable HFRI 500 Relative Value Index gained +0.2 per cent for the month, while the HFRI Relative Value (Total) Index advanced +0.3 per cent. Sub-strategy gains were led by the HFRI RV: Yield Alternative Index, which gained +2.4 per cent, as well as the HFRI RVA: Volatility Index, which added +1.4 per cent, with both reversing the prior month’s declines. For the full year 2021, RVA performance was led by the HFRI RV: Yield Alternative Index which returned +30.9 per cent.
Macro strategies also advanced for the month, as commodities gained while interest rates continued to rise, with the HFRI Macro (Total) Index advancing +0.65 per cent, while the investable HFRI 500 Macro Index posted a narrow decline of -0.05 per cent for the month. Macro sub-strategy gains were led by the HFRI Macro: Multi-Strategy Index which jumped +2.9 per cent in December. For the full year 2021, Macro sub-strategy performance was led by the HFRI Macro: Commodity Index, which surged +23.6 per cent.
Risk Premia strategies also reversed prior month declines as risk on sentiment returned in late December, with gains driven by the HFR BSRP Equity Index which surged +4.57 per cent for the month. For the full year 2021, Risk Premia performance was driven by the HFR BSRP Commodity Index, which soared +27.4 per cent. The HFRX Market Directional Hedge Fund Index jumped +1.6 per cent in December and led all HFRX composite indices for 2021 with a gain of +13.65 per cent; the HFRX Equity Hedge led strategy performance for 2021, advancing +12.1 per cent on the year.
The HFRI Diversity Index gained +1.9 per cent in December, while the HFRI Women Index added +0.5 per cent.
“Led by high-beta strategies of Equity Hedge, Event Driven and commodities, hedge funds concluded 2021 with strong performance in December, capping a robust 2-year period and successfully navigating extreme volatility and market cycle dislocations since the inception of the coronavirus pandemic and global quarantine as the total hedge fund industry surpassed USD4 trillion in capital,” says Kenneth J Heinz, President of HFR.
“Since and inclusive of the historic equity market collapse from the outbreak of the global pandemic, equity-focused hedge fund strategies have significantly outperformed US equities (as represented by the DJIA) by over 200 basis points and have done so with one-third less volatility. Into 2022, hedge fund managers are positioning for continued volatility associated with the global pandemic but are also tactically focused on capital preservation across equity, fixed income, and commodity markets, considering the powerful dynamics of rising interest rates and record inflation. Managers which have demonstrated the robustness of their strategies over the past two years will likely continue to lead industry performance and growth though the new year.”
