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Long volatility, CTAs and AI hedge funds shine as hedge fund performance dispersion widens to October 2008 level

Wednesday, April 08, 2020
Opalesque Industry Update - The Eurekahedge Hedge Fund Index was down 4.40% in March 2020 (-6% YTD), outperforming the underlying equity market as represented by the MSCI ACWI IMI (Local), which lost 13.99% over the month.

Global equities were in free fall throughout the better part of the month, before recouping some of their losses later on. The COVID-19 outbreak continued to worsen across more than a hundred countries, with the United States overtaking China as the country with the highest number of confirmed cases. US authorities were forced to implement lockdown and stringent social distancing measures to contain the outbreak, resulting in an increase in unemployment rate and slowing economic growth as businesses deemed non-essential were forced to temporarily cease their operations. In response, the US administration introduced an economic stimulus package worth US$2 trillion on top of the Fed's emergency policy rate cut and restart of quantitative easing. The moves were aimed to support the economy from the negative impact of the disease outbreak and increase market liquidity.

The US equity benchmarks recorded their worst quarterly performance since 1987, as they ended the month of March with double-digit losses - the DJIA and S&P 500 were down 13.74% and 12.51% respectively.

In the same vein, European equities underperformed their global peers as the coronavirus outbreak situation worsened in the region, turning it into the new epicentre of the pandemic. The CAC 40 and the DAX plummeted 18.01% and 16.44% respectively throughout the month of March.

On the other hand, Chinese equity markets outperformed other regions as Mainland China is on track to ease its months-long lockdown. The Shenzhen and Shanghai Composite indices were down 7.54% and 4.51% respectively in March.

Contrary to the relative underperformance of the region's equity market, fund managers focusing on North America were down 3.48%, topping their Asia ex-Japan and European peers who were down 7.37% and 5.77% respectively over the month.

Roughly 32.0% of the underlying constituents of the Eurekahedge Hedge Fund Index posted positive returns in March, and 33.2% of the hedge fund managers in the database were up over the first three months of 2020. More than 80% 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 March revealed it to be the most volatile month for hedge funds in recent years as captured by the dispersion of returns. The top 10% of the hedge fund managers tracked by Eurekahedge have returned no less than 6.88% in March.

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

• Hedge fund managers were down 4.40% in March, outperforming the MSCI AC World Index IMI (Local) by 9.59% during the month - a level of outperformance unseen since October 2008. Long volatility-focused strategies, CTA/managed futures and AI hedge funds top the Q1 2020 league table, while equity long-biased hedge funds nurse losses of close to 20%.

• On an asset-weighted basis, hedge funds were down 6.49% in March, as captured by the Mizuho Eurekahedge Hedge Fund Index (USD). The index is currently down 8.95% year-to-date.

• As of Q1 2020, the global hedge fund industry AUM has declined by almost US$110 billion based on preliminary estimates for March data. Performance-driven losses so far for the year stand at roughly US$70 billion while investors have redeemed US$40 billion from underlying managers so far. We expect the performance-driven decline for Q1 2020 to exceed the US$130 billion mark once full March numbers have rolled in.

• The Eurekahedge North America Long Short Equities Hedge Fund Index slid 6.65% lower in March, attributed to the massive sell-offs in the US equity markets throughout the month, driven by the worsening COVID-19 outbreak situation in the country. Underlying constituents for the index have outperformed the S&P 500 Index by 9.24% as of March 2020 year-to-date.

• The Eurekahedge Greater China Hedge Fund Index was down 4.92% in March, outperforming the Hang Seng Index by 4.75% and the Shenzhen Composite Index by 2.62%. 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$30.7 billion mandate was down 4.64%.

• The Eurekahedge Fixed Income Hedge Fund Index was down 8.58% in March, recording its worst monthly performance since the index's inception. Exposure to high yield corporate bonds acted as the primary performance detractor for fixed income hedge fund managers during the month, as the COVID-19 outbreak resulted in higher default rates and lower credit ratings.

• The Eurekahedge CTA/Managed Futures Hedge Fund was up 2.25% in March, despite the sharp decline of energy prices, which fell to their lowest level since 2002 during the month as fund managers adjusted their exposure to the sector. Long exposure to equities was a common performance detractor for CTA/managed futures funds during the month.

• Fund managers utilising AI/machine learning strategies gained 3.45% in March, registering their third consecutive month of outperformance against the wider hedge fund industry. On a year-to-date basis, the Eurekahedge AI Hedge Fund Index is up 3.19%.

• The CBOE Eurekahedge Long Volatility Hedge Fund Index was up 23.13% in March - recording its strongest monthly return since inception. The CBOE VIX spiked past 80, a level it has not seen since October 2008, reflecting the elevated level of market volatility during the month. Fund managers comprising the index recorded their best quarterly performance since 2005, as they returned 34.79% over the first quarter of 2020.

• The Eurekahedge Crypto-Currency Hedge Fund Index was down 20.21% in March, outperforming Bitcoin which ended the month down 26.14%. Fund managers focusing on crypto-currencies are down 4.79% over the first three months of 2020.


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