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Macro gains fail to offset HFRI September declines

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Hedge funds declined for the fourth consecutive month in September, according to HFR, with global equities, commodities and high yield credit posting steep losses, while volatility posted increases sustained throughout the month.

The broad-based HFRI Fund Weighted Composite Index declined by 1.1 per cent in September, the fourth consecutive monthly decline for the Index and the longest such sustained decline since the Financial Crisis in 2008. The performance drawdown of -5.0 per cent since June brings the YTD Index performance through September to a decline of 1.3 per cent, which still tops the S&P 500 by 400 basis points and the DJIA by over 700 bps.
September declines were led by equity and credit-sensitive Event Driven (ED) strategies, with the HFRI Event Driven Index posting a decline of 2.5 per cent, led by exposure to positions in Glencore, Valeant and high yield credit. The HFRI ED Index has experienced a four-month performance drawdown of -7.0 per cent since June, bringing YTD performance to a decline of 3.2 per cent. Activist strategies were the weakest area of ED performance for the month, with the HFRI Activist Index falling 5.2 per cent, dropping YTD performance to -4.7 per cent.
Uncorrelated Macro strategies partially offset declines across many directional strategies in September, with the HFRI Macro Index advancing 0.4 per cent, led by quantitative CTA strategies; the HFRI Macro: Systematic Diversified/CTA Index gained 1.4 per cent for the month. CTAs benefitted from long fixed income exposure as yields sharply declined, while also benefitting from short exposure to commodities, including oil. The HFRI: Macro Active Trading Index gained +0.1 per cent in September, while the Macro: Multi-Strategy Index posted a narrow decline of 0.4 per cent. Led by declines in Latin America, the HFRI Emerging Markets Index fell 1.9 per cent for the month, bringing YTD performance to -5.7 per cent.
Equity Hedge (EH) strategies also posted losses for the month, as global equities declined sharply, resulting in the HFRI Equity Hedge Index falling by 1.7 per cent. Exposure to the volatile biotechnology sector was only partially offset by gains in Equity Market Neutral and Short Bias strategies, as the HFRI EH: Technology/Healthcare Index declined 3.5 per cent, while the HFRI Equity Market Neutral and HFRI Short Bias Indices gained 1.1 and 0.2 per cent, respectively.
As high yield credit spreads widened, fixed income-based Relative Value Arbitrage (RVA) strategies posted declines for the month, with the HFRI Relative Value Index falling 1.0 per cent. RVA sub-strategy declines were led by energy infrastructure partnerships (MLPs), as the HFRI Yield Alternative Index fell 6.1 per cent in September. Partially offsetting these declines, the HFRI Volatility Index gained 2.4 per cent for the month and leads all RVA sub-strategies YTD with a gain of 6.5 per cent.
“Performance declines in September and recent months reflect expanding hedge fund outperformance of global equities as financial market volatility has increased and equity declines have accelerated,” says Kenneth J Heinz (pictured), President of HFR. “Hedge fund performance dispersion also recently expanded, with a combination of categorical strategy characteristics including net exposure, leverage, sector concentration and idiosyncratic positions contributing to large differentiation between the best and worst performing funds. Funds which have positioned for macroeconomic uncertainty and market volatility are expected to attract interest from investors looking to access alternative equity and credit exposures.”

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