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Tail risk returns as short-volatility hedge funds post biggest loss since August 2015 China market crash

Tuesday, February 13, 2018
Opalesque Industry Update - Hedge funds were off to a good start in the first month of 2018, with the Eurekahedge Hedge Fund Index up 2.26%1 in January. Meanwhile, underlying markets as represented by the MSCI AC World Index (Local) gained 3.78% over the same period.

As the global risk on mode continued into January, trend following managers were positioned in good stead with holdings into equities and oil among performance contributors. Equity markets strengthened following the passing of tax reform in December, resulting in an increase of investments which drove US equities to all-time highs. Over in Europe, the growth momentum appears to be going strong with a strengthening Euro adding to gains for foreign investors in the region. Yield on sovereign bonds, particularly the Gilt and German bund, ended higher in January backed by positive signs of German coalition talks.

Emerging markets led by Russia, China and Brazil have also contributed to strong gains for hedge fund managers as global risk appetite remains strong, with a weakening USD favouring exposure to EM markets where valuations remain relatively cheap. Among regional mandates, Latin American hedge fund managers topped the tables, gaining 4.47% while CTA/managed futures managers posted the best returns, up 3.84% among strategic mandates.

While the full figures for February 2018 returns will start rolling in towards month-end, the spike in volatility in recent days has brought an end to the Trump rally. Short-volatility hedge fund strategies will likely see substantial losses in February, while tail-risk and long volatility strategies will finally see some redemption following double-digit losses during the exceptionally calm markets of 2017. If however this volatility spike is short-lived and the VIX trends lower towards the month end then long volatility managers will see their winnings get trimmed. Watch out for the returns across volatility strategies @CBOE Eurekahedge Volatility Hedge Funds.

Below are the key highlights for the month of January 2018:

• Hedge funds gained 2.26% in January with underlying markets, as represented by the MSCI AC World Index (Local) up 3.78% over the same period. Over the past year, hedge funds were up 8.65% with managers posting 12 consecutive months of gains.

• Among developed mandates, North American hedge funds were up 1.89%, followed by Japan and European mandated hedge funds which gained 1.28% each for the month. Over the past year, Japan hedge funds managers topped 2017 returns among developed mandates (+13.12%) while North American and European managers posted high single digit gains.

• The Eurekahedge CTA/Managed Futures Hedge Funds Index posted the best January 2018 returns, gaining 3.84%, with underlying trend-following hedge funds leading much of the strength, up 4.69% over the same period. Underlying commodity-focused managers gained 2.38% while FX-focused peers were down a modest 0.01%.

• Asia ex-Japan hedge funds started the year on a positive note, up 3.58% for the month with strength led by underlying Greater China focused funds which were up 8.56% over the same period while India focused hedge funds were down 1.46% during the month. Over the past year, Asia ex-Japan managers posted an impressive returns, gaining 20.87% with performance supported by Greater China focused funds which were up 29.63%.

• Among volatility-focused hedge funds, short volatility hedge funds posted the worst performance in January 2018, down 3.30% while long volatility and relative value hedge funds gained a modest 0.01% and 0.16% over the same period.

• The Eurekahedge Crypto-Currency Hedge Fund Index was down 4.55% in January following gains of 1477.85% in 2017 as bitcoin began its tumble

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