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Hedge fund strategies soar: Industry enjoys biggest annual return since Global Financial Crisis, as managers weather 2020 storm with double-digit surge

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Hedge funds weathered the political, social and economic shocks brought about by the global pandemic and frequent bursts of soaring volatility to score a near-12 per cent return last year – their best since 2009 – outperforming both the Dow Jones Industrial Average and FTSE 100, new data from Hedge Fund Research shows.

HFRI’s main Fund Weighted Composite Index – a global, equal-weighted measure of some 1400 single-manager hedge fund strategies – finished 2020 up 11.6 per cent for the year following a 4.5 per cent rise in December.

The full-year gains represent a strong rebound for the hedge fund sector as a whole, which had earlier plummeted 11.6 per cent in Q1 following three months of consecutive losses amid the initial coronavirus outbreak.

The index’s annual 11.6 per cent rise builds on 2019’s 10.45 per cent annual return. The strong annual showing – the benchmark’s best since a near-20 per cent surge in 2009, at the height of the Global Financial Crisis – is likely to further draw in more yield-hungry allocators, according to HFR president Kenneth Heinz.

“Hedge funds effectively navigated both December and calendar year 2020 volatility, and accelerated into 2021 with powerful, broad-based performance which continued yet broadened the high-beta equity- and crypto-driven gains to also include quantitative, trend-following macro, energy and special situations exposures,” Heinz observed.

“Leading institutions are likely to continue expanding allocations to hedge funds as a preferred portfolio mechanism to opportunistically participate in these dynamic trends while mitigating inherent risks with specialised, tactical long-short exposures.”

Equity-focused hedge fund managers rose 5.54 per cent in December, ending the year up 17.49 per cent, beating 2019’s 13.71 per cent annual rise.

Every equity-based hedge fund sub-strategy finished the year comfortably in double-digit territory, except market neutral managers, which were essentially flat at -0.06 per cent annually.

Among the standout equity performers were energy and basic materials managers, whose near-13 per cent December rise put them up 33 per cent on an annual basis. Similarly, multi-strategy and technology equity hedge funds each surged more than 27 per cent annually in 2020. Healthcare hedge funds successfully traded on the pharmaceutical and med-tech sectors’ response to the Covid-19 emergency with a near-26 per cent annual surge.

Event driven hedge funds, which were up 7.49 per cent in 2019, returned 9.30 per cent in 2020, having notched up a 4.49 per cent in the final month of 2020. Distressed and restructuring-focused strategies grew 11.37 per cent over the 12-month period, capitalising on the broader economic ruptures, while multi-strategy event driven funds added more than 14 per cent last year. Activist managers also fared well last year, surging 10 per cent, while special situations hedge funds gained more than 6 per cent in December which brought their annual return to 8.24 per cent.

Macro hedge funds – which bet on macroeconomic themes using an assortment of instruments and assets including interest rates, futures, commodities and currencies – have endured a rocky 12 months as a result of the global economic shocks. But a 3.93 per cent gain last month ultimately bolstered the sector in the final stretch of 2020, pushing macro managers to a 5.22 per cent annual return, compared with a 6.50 per cent gain in 2019.

Discretionary thematic hedge funds led the macro pack with a 10.63 per cent gain over the course of 2020. Active trading funds were up more than 9 per cent, while currency-based strategies and multi-strategy macro hedge funds both added more than 4 per cent in what was a tough year.

Within the relative value hedge fund category, fixed income convertible arbitrage strategies finished the year out in front, up more than 12 per cent annually following a 2.09 per cent return in December. Fixed income corporate funds gained 7.23 per cent in 2020, while multi-strategy relative value managers rose more than 6 per cent. Asset-backed strategies lost almost 2 per cent annually, while volatility-based relative value funds fell some 3 per cent during the year.

Overall, relative value hedge funds advanced 3.28 per cent over the 12-month period, a sharp fall from 2019’s 7.42 per cent annual return.

Hedge funds also capitalised on the strong momentum in digital assets towards the end of 2020. The  HFR Blockchain Composite Index returned 18.6 per cent in December, which brought its full-year performance to 190.1 per cent, while the HFR Cryptocurrency Index increased 18.3 per cent for the month.

Emerging markets meanwhile climbed 4.31 per cent in December, putting their total year gains at 11.77 per cent. Among the biggest winners were China-focused hedge funds, which soared more than 23 per cent annually, strategies focused on Asia ex-Japan, which gained almost 19 per cent, and India-centred managers, advancing 11.15 per cent for the year.

“With the strong performance, hedge funds are continuing to evolve with the shifting geopolitical risk and macroeconomic opportunity set, with certain trends accelerating into the new year, while others reverse or evolve with greater clarity on vaccine and political outcomes,” Heinz added.

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