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Hedge funds hammered after Omicron variant spooks markets

Hedge funds have suffered their biggest hit in 18 months after the emergence of the new Omicron coronavirus variant sent markets into a tailspin last month.

Hedge funds have suffered their biggest hit in 18 months after the emergence of the new Omicron coronavirus variant sent markets into a tailspin last month.

New data published on Wednesday by Hedge Fund Research reveals managers shed 2.17 per cent during November, reversing October’s 1.85 per cent gain, with strategies of all stripes losing money.

The losses – as measured by HFR’s main Fund Weighted Composite Index, a monthly benchmark tracking the average returns of 1400 single manager hedge funds – mean hedge funds’ year-to-date returns now stand at 8.73 per cent, lagging 2020’s 11.83 per cent full-year return.

November’s slide was also the biggest single-month decline since the onset of the Covid-19 pandemic in March 2020, with concerns over the newly-emergent Omicron strain fueling a steep market sell-off in which equities and macro hedge funds took the biggest battering.

“In addition to this, hedge fund performance was also impacted by evolving expectations for higher inflation and interest rates in the US sooner than had been expected by many investors,” said HFR president Kenneth Heinz.

Equity-focused managers, which trade stocks long and short across specialist sub-strategies, took the largest dent in November, ending the month down 2.71 per cent as global equities went into retreat as news of the variant sent investors fleeing. Overall, equity hedge funds remain up 9.79 per cent in the 11 months since the start of the year.

Within the equities sector, only quantitative directional funds ended the month in the black, advancing 2.19 per cent to put them up by some 15 per cent year-to-date. On the downside, healthcare-focused equity strategies lost 6.59 per cent, wiping out their 2021 gains and leaving them down 5.64 per cent for the year. Fundamental value managers fell 3.60 per cent in November, as multi-strategy equity hedge funds lost 2.77 per cent, fundamental growth shed 1.79 per cent, and technology-focused funds slipped 1.72 per cent. Energy and basic materials-focused managers, which trade commodities markets, are the best performing equities funds in 2021, up more than 25 per cent of the year, despite a 1.43 per cent November reversal.

Macro hedge funds – which trade macroeconomic and geopolitical trends using equities, bonds, currencies, and commodities, among other assets – lost 2.36 per cent last month. Since the start of January, the sector has returned 6.77 per cent. 

Systematic diversified macro managers lost 3.47 per cent in November, the largest reversal within macro, though they remain up more than 6 per cent YTD, while multi-strategy macro funds dropped 1.86 per cent for the month, and are up 5.33 per cent for the year. Discretionary thematic strategies are up 2.43 per cent for the year, having suffered a 0.79 per cent reversal last month. Currency funds ended the month up, advancing 2.63 per cent, to put them 0.94 per cent in the black YTD, while commodities-based strategies dropped 1.67 per cent, but have soared more than 21 per cent in the 11-month period. 

Meanwhile, event driven – which invest in stock mispricings and other valuation anomalies stemming from mergers and acquisitions, bankruptcies, takeovers and other corporate events – is the best-performing hedge fund sub-strategy in 2021, up more than 11 per cent year-to-date, despite losing 1.45 per cent last month.

Here, distressed/restructuring managers and merger arbitrage funds were both flat for the month, while the rest of the sector – activist, credit arbitrage, multi-strategy, and special situations funds – all ended the month down between 1 per cent and almost 3 per cent. However, almost all sub-strategies are in double-digit territory on a year-to-date basis, with distressed/restructuring (16.19 per cent), special situations (11.85 per cent), and activist managers (11.69 per cent) leading the way.

By comparison, fixed income relative value hedge fund strategies, which are sensitive to rate movements, managed to contain losses, registering a 0.70 per cent dip overall for November, and are up more than 7 per cent for the year.

Accordingly, performance dispersion within this sub-class was narrower than in other strategies: asset-backed-focused strategies and convertible arbitrage hedge funds added just under 1 per cent, while volatility, multi-strategy, corporate and sovereign-focused managers were down by similar amounts. Year-to-date, asset-backed and convertible arb strategies have gained more than 7 per cent, multi-strategy funds have added more than 6 per cent and fixed income corporate-focused funds are up more than 5 per cent.

Despite the widespread losses, Heinz sounded a note of optimism as the year draws to a close.

“While the recent volatility and speed of the equity market correction may have been alarming to many retail investors, the decline only pared the strong 2021 intra-year gain, with many strategies only partially reversing the prior month gains,” Heinz observed. 

“The fundamentals which have driven strong hedge fund performance, not only in 2021 but since the beginning of the pandemic, including re-opening trade positions, technology leadership, improving economic fundamentals, and dynamic IPO and M&A activity, have not only continued but accelerated in recent months and these powerful, positive intermediate-term trends are likely to persist into 2022.”

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