The Wilshire Liquid Alternative Index, which provides a representative baseline for how the broad liquid alternative investment category performs, returned 0.40 per cent in March, and -0.99 per cent for the first quarter in 2018.
Both returns underperformed the -0.98 per cent monthly return and -1.02 per cent quarterly return of the HFRX Global Hedge Fund Index.
The Wilshire Liquid Alternative Index family is a joint offering between Wilshire Funds Management, the global investment management business unit of Wilshire Associates Incorporated, and Wilshire Analytics, creator of the Wilshire 5000 Total Market Index.
“With a significant increase in volatility, the first quarter was a completely different environment than we had seen over the past year and a half,” says Jason Schwarz (pictured), President of Wilshire Funds Management and Wilshire Analytics. “A sharp increase in rates led to outperformance by unconstrained bond funds, which have the ability to go underweight or short duration.”
The Wilshire Liquid Alternative Multi-Strategy Index, which includes both single and multi-manager funds, returned -0.39 per cent in March, and -1.04 per cent for the first quarter in 2018.
The Wilshire Liquid Alternative Global Macro Index, which includes systematic, discretionary, commodity and currency funds, ended the month down -0.31 per cent, outperforming the -0.79 per cent return of the HFRX Macro/CTA Index. The Index finished the first quarter negatively, returning -1.71 per cent, outperforming the HFRX Macro/CTA Index’s quarterly return of -2.03 per cent. For the quarter, systematic, discretionary, and currency strategies contributed negatively to the Index. January started extremely strong as the Wilshire Global Macro Index had its best month since the inception of the index in 2006. This was led by systematic strategies and long equity exposure due to the extended bullish trend and low volatility. However, February and March proved to be difficult as the sharp reversal in February caught managers off guard. Discretionary managers were also hurt during this sharp selloff in equities during February and March. The markets moved sideways over the next couple of months with large daily moves both to the upside and downside, which is not conducive to trend followers.
The Wilshire Liquid Alternative Relative Value Index, which includes credit, convertible arbitrage and volatility funds, finished the month down -0.05 per cent, outperforming the -0.33 per cent return of the HFRX Relative Value Arbitrage Index. The first quarter’s -0.01 per cent performance underperformed the HFRX counterpart’s 0.99 per cent return. The 10-year U.S. Treasury yield increased from 2.4 per cent at the beginning of the year, to 2.94 per cent mid-February, before closing out the quarter at 2.74 per cent. This large and sudden move was due to inflation concerns after January’s Consumer Price Index (“CPI”) growth numbers increased. Inflation concerns impact both equities and interest rates; however, those concerns subsided once February CPI numbers were released. The potential tariffs and fear of a “trade war” with China led to further uncertainty and volatility throughout the quarter. Unlike traditional fixed income, many of the credit strategies were intentionally underweight duration and, therefore, did not feel the negative impact of the sudden rate rise. Volatility and convertible arbitrage managers both performed positively for the month as the increase in volatility led to more opportunities.
The Wilshire Liquid Alternative Equity Hedge Index, ended March down -0.95 per cent and the first quarter down -2.28 per cent, underperforming the HFRX Equity Hedge Index’s -0.69 per cent March return and underperforming the -1.17 per cent quarterly return. Long-biased equity strategies underperformed in February and March, driven by the weak and volatile equity markets. Quantitative and systematic strategies had strong performance, while growth strategies continued to outperform value-oriented strategies. Certain put/call option strategies underperformed in the volatile environment. Growth strategies continued to outperform value investment strategies, a trend observed throughout 2017, primarily driven by Technology and Consumer Discretionary stocks’ significant gains. Market neutral strategies added positively to the index.
The Wilshire Liquid Alternative Event Driven Index, which includes credit, merger arbitrage and special situations funds, ended March down -0.70 per cent and the first quarter up 0.21 per cent, outperforming the HFRX Event Driven Index’s March return of -2.16 per cent and first quarter return of -4.80 per cent. Credit managers focused on taking credit risk in floating rate products, such as leveraged loans and structured credit, outperformed as credit spreads remained tight and interest rates rose. Merger arbitrage strategies were positive as a group and provided non-correlated returns as broader equity markets were volatile.