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Hedge fund managers posted strongest monthly outperformance over global equities since 2009

Wednesday, March 11, 2020
Opalesque Industry Update - The Eurekahedge Hedge Fund Index was down 1.63 in February, outperforming the underlying equity market as represented by the MSCI ACWI IMI (Local), which lost 7.82% over the same period. Roughly 34.7% of the underlying constituents of the Eurekahedge Hedge Fund Index posted positive returns in February, and 43.2% of the hedge fund managers in the database were up over the first two months of 2020. More than 90% of the hedge fund managers were able to outperform the global equity market during the month, exemplifying the downside protection afforded by hedged strategies as opposed to long-only portfolios.

Preliminary results for February revealed it to be the most volatile month for hedge funds in the past 12 months as captured by the dispersion of returns.

Global equities started the month on a positive note, driven by the market optimism towards the containment of the COVID-19 as the number of newly infected people in Mainland China decelerated and central banks announced stimulus packages. The NASDAQ Composite recorded a new all-time high for the week ending February 14. However, during the second half of the month, market risk sentiment shifted as investors grew concerned over the extent of the outbreak outside China, particularly in Italy and South Korea, resulting in a massive sell-off of global equities. For the week ending February 28, the US equity benchmarks recorded their worst week since the 2008 global financial crisis, with the DJIA and S&P 500 losing 12.36% and 11.49% respectively. In the same vein, European equities ended the month of February in negative territory, with the CAC40 and DAX down 8.55% and 8.41% respectively, despite the dovish stance exhibited by the ECB and fiscal stimulus announced by the German government. On the other hand, Asian equities outperformed their global peers, despite being the epicentre of the coronavirus outbreak as global attention shifted overseas. The Shenzhen Composite Index gained 2.56% during the month, and the Hang Seng Index recorded a small loss of 0.69% in February. Fund managers focusing on Asia ex-Japan were down 0.89%, outperforming their European and North American peers who were down 2.35% and 2.04% respectively over the month.

Below are the key highlights for the month of February 2020:

  • Hedge funds registered their strongest outperformance relative to underlying markets since February 2009, outperforming the MSCI AC World Index IMI (Local) by 6.18% in February. Long Volatility/Tail Risk hedge funds led the performance tables and have outshined most other asset classes including gold

  • On an asset-weighted basis, hedge funds were down 2.50% in February, as captured by the Mizuho Eurekahedge Hedge Fund Index (USD). The index is currently down 2.76% year-to-date.

  • The Eurekahedge North American Long Short Equities Hedge Fund Index declined 4.16% over the first two months of 2020, weighed by the US equity market sell-offs toward the end of the month. Underlying constituents for the index have outperformed the S&P 500 Index by 4.40% as of February 2020 year-to-date.

  • The Eurekahedge Greater China Hedge Fund Index was up 2.55% in February, outperforming the Hang Seng Index by 3.24% and the CSI 300 Index by 4.14%. Optimism over the improving COVID-19 situation in Mainland China and the accommodative policies of the PBOC have provided some support for the region's equity market. On a year-to-date basis, the US$30.3 billion mandate was up 1.07%.

  • Hedge fund managers utilising fixed income strategies were down 0.77% in February, in spite of the risk-off sentiment in the market, which boosted global government bonds throughout the month. The Fed and the ECB have signalled potential policy supports to counter the economic slowdown caused by the COVID-19 outbreak, resulting in lower bond yields during the month.

  • Fund managers utilising AI/machine learning strategies lost 0.32% in February, breaking their streak of five consecutive positive months since September last year. On a year-to-date basis, the Eurekahedge AI Hedge Fund Index is still up 0.51%.

  • The Eurekahedge Crypto-Currency Hedge Fund Index was down 0.68% in February, outperforming Bitcoin which ended the month down 8.03%. Fund managers focusing on crypto-currencies are up 18.70% over the first two months of 2020.

Regional Indices

North American and European hedge fund managers were down 2.04% and 2.35% in February as concerns surrounding the spread of COVID-19 outside of Mainland China escalated toward the end of the month. Over in Asia, fund managers with Asia ex-Japan investment mandate ended the month down 0.89%, outperforming their Japan-focused peers who were down 4.55% over the same period.

Strategy Indices

Returns were mostly negative across strategic mandates in February with the notable exceptions of long volatility and tail risk mandates gaining 11.86% and 11.36% respectively. The risk-off sentiment in the market resulted in heightened level of volatility throughout the second half of the month, pushing the CBOE VIX past 40 - a level not seen since February 2018. On the other hand, equity long bias managers were down 5.91% year-to-date, in contrast to how they outperformed other strategic mandates with 16.65% return over 2019.

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