Hedge funds posted mixed performance to begin the fourth quarter, as US equities weakened amid increasing uncertainty before election day, not just on the presidential-front, but also with regard to the control of Congress and state-level results.
Rising market uncertainty resulted in a divergence between top hedge fund firms, which produced strong gains, and smaller firms, which suffered declines.
The HFRI Asset Weighted Composite Index (AWC) posted a gain of 0.6 per cent for October, driven by strong returns in leading Macro funds, while the HFRI Fund Weighted Composite Index (FWC) fell 0.6 per cent for the month, bringing the index value to 12,722, according to HFR.
October represents the fourth consecutive monthly gain for the HFRI Asset Weighted Composite Index and the largest since the AWC Index gained 1.4 per cent in July. October was also the first monthly decline for the HFRI FWC since February, paring the YTD gain to 3.6 per cent. Despite the decline, the HFRI FWC outperformed both US and global equities by 120 and 140 basis points (bps), respectively, in October, expanding the YTD performance differential over global equities to approximately 180 bps and narrowing the YTD differential to US equities to 230 bps.
Macro hedge funds experienced a wide performance differential by firm size in October, as commodities fell and the US Dollar gained. The HFRI Macro Index (Asset Weighted) surged 1.3 per cent, the strongest monthly gain since November 2015, driven by falling investor risk tolerance, uncertainty over the US election, and expectations for near-term interest rate increases.
The equally-weighted HFRI Macro (Total) Index declined 1.5 per cent for the month, the third consecutive monthly decline, paring YTD performance to a gain of 0.2 per cent.
Trend-following strategies posted a sharp decline concentrated in fixed income and commodity metals, with the HFRI Macro: Systematic Diversified Index falling 2.9 per cent, dropping YTD performance to -1.9 per cent.
Offsetting CTA losses, the HFRI Macro: Discretionary Thematic Index advanced 1.2 per cent, though both the HFRI Currency Index and HFRI Commodity Index posted narrow losses.
Led by regional exposures to MENA and Latin America, the HFRI Emerging Markets (Total) Index added 1.5 per cent for the month, increasing YTD performance to +9.6 per cent.
Despite the US election uncertainty and the increase in bond yields, fixed income-based relative value arbitrage (RVA) strategies posted gains in October as M&A activity surged. The HFRI Relative Value (Total) Index advanced 0.2 per cent for the month, the eighth consecutive monthly gain, bringing YTD performance to +6.0 per cent. RVA sub-strategy performance was led by the HFRI Volatility Index, which gained 1.3 per cent for the month, and the HFRI RV: FI-Asset Backed Index, which added 1.1 per cent. For the year, RVA sub-strategy performance is led by the HFRI Yield Alternatives Index, which has gained 11.0 per cent YTD, despite falling 3.2 per cent in October.
Event driven (ED) strategies also posted gains for the month, as M&A activity surged on announcements in AT&T/Time Warner and GE/Baker Hughes transactions; gains were offset by volatility in widely-held shareholder activist positions.
The HFRI Event-Driven (Total) Index posted a narrow gain of 0.04 per cent in October, as ED continues to lead all strategies YTD with a 6.8 per cent return.
Distressed hedge funds led all ED sub-strategies in October, as the HFRI ED: Distressed/Restructuring Index advanced 2.4 per cent, extending its YTD return to +11.6 per cent; credit arbitrage and multi-strategy ED hedge funds also added gains in the month. The HFRI Activist Index fell 1.9 per cent in October, as volatility increased in several widely-held activist positions, despite the surge in M&A activity. The HFRI ED: Special Situations Index fell 0.7 per cent in the month, although the index remains up 8.0 per cent for the year.
Similar to macro, equity hedge (EH) strategies also posted mixed October performance as equities declined, with larger equity hedge funds posting gains while smaller funds produced declines. The HFRI Equity Hedge Index (Asset Weighted) advanced 0.06 per cent for the month, while the equally-weighted HFRI Equity Hedge (Total) Index declined 0.5 per cent, paring its YTD return to +3.7 per cent.
EH sub-strategy gains in fundamental growth and market neutral were offset by declines in technology and energy exposures. The HFRI EH: Technology/Healthcare Index fell 3.4 per cent in October, the largest monthly decline since January 2016, while the HFRI EH: Fundamental Growth Index advanced 0.6 per cent for the month, bringing YTD performance to +5.6 per cent.
“Falling investor risk tolerance drove gains at defensively-positioned, top hedge fund firms across macro and equity hedge strategies in October, while surging M&A activity drove gains within relative value arbitrage and event driven strategies, despite sharp declines among widely-held shareholder activist positions,” says Kenneth J Heinz, president of HFR. “Despite the uncertain result of the US election on Tuesday, financial market volatility is likely to persist post-election, as markets discount a divided voter base for the coming term. Hedge funds positioned for the continuation of this uncertain macroeconomic and political environment are likely to lead industry performance into 2017.”