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News March 2014
Equities and commodities lead in February Hedge funds posted strong gains in February as equity, commodity and fixed income markets recovered from the prior month’s volatility, despite continued turbulence in emerging markets. The HFRI Fund Weighted Composite Index advanced 2.1% for the month, the best monthly gain in over a year, benefiting from significant and broad-based contributions across a diverse range of strategies, according to data released today by HFR. The HFRI Fund of Funds Index gained 1.8% for the month, also the strongest gain since January 2013.
Industry gains were led by equity hedge strategies, with the HFRI Equity Hedge Index climbing 2.9% in February, the best monthly performance since the index returned 2.51% in January 2013. Within equity hedge sub-strategies, the volatile HFRI EH: Energy/Basic Materials Index gained 4.4%, its best performance since January 2012. The HFRI EH: Technology/Healthcare Index extended the strong recent performance, up 4.3%; the index led all strategies with a gain of 22.5% in 2013 and leads 2014 with a YTD return of 7.0%. The HFRI Fundamental Growth Index gained 3.2% for the month, while the HFRI Fundamental Value Index was up 2.6%.
Benefiting from continuing improvement of investor risk tolerance and a strong transactional M&A environment, event-driven funds also posted strong gains in February, led by distressed/ restructuring. The HFRI Event Driven Index was up 2.1%, posting its 18th gain in the past 21 months, while the HFRI ED: Distressed Index climbed 3.0% for the month, the 19th gain in the past 21 months. Activist, merger arbitrage and special situations funds also contributed to ED performance for the period.
Strong performance across commodity, emerging markets, CTA and discretionary macro strategies drove the HFRI Macro Index to a gain of 1.4% for the month, its best performance since July 2012. The HFRI Macro: Commodity Index gained 2.7% for the period, led by contributions across energy and agriculture exposures. The HFRI Emerging Markets Index gained 2.6%, led by regional exposures to the Middle East and recovery in funds focused on Latin America, with the HFRI EM: Latin America Index up 3.2% for the month. The HFRI Macro Discretionary Index gained 1.7%, the strongest gain since January 2013, while the HFRI Systematic Diversified Index advanced 1.6%, the strongest gain since April 2013.
Fixed income-based relative value strategies also posted gains for the month, with the HFRI Relative Value Arbitrage Index adding 1.2% for the month, the 53rd gain in the past 62 months. RVA gains
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were led FI: Corporate strategies, with the HFRI FI: Corporate Index gaining 1.4%, though all RVA sub-strategies had positive contributions to index performance for the month.
“The sharp reversal of investor risk tolerance from the January bottom contributed to strong performance gains in February across a broad range of strategies which categorically exhibit high levels of volatility, including commodities, emerging markets, energy, technology and distressed bonds,” stated Kenneth J. Heinz, president of HFR. “In contrast to the powerful equity beta trend which dominated 2013, the EM-centric volatility which has characterised early 2014 has contributed to an opportunity- rich environment for funds which have the fundamental expertise and trading acumen to monetise these shifting volatility paradigms. In this way, hedge funds comprise a sophisticated portfolio mechanism for investors to access these volatile areas and a valuable portfolio complement to traditional exposures for institutional investors.”
Emerging markets fall Hedge funds investing in Latin America and Eastern Europe experienced sharp losses to begin 2014 even as the funds saw strong capital inflows from investors to start the year, according to the latest HFR Emerging Markets Hedge Fund Industry Report. Total hedge fund capital invested in emerging markets (EMs) increased by over $9 billion in 4Q 2013 to over $170 billion (Chinese renminbi: 1.03 trillion, Brazilian real: 396 billion, Russian rouble: 6.04 trillion, Saudi riyal: 637 billion, Indian rupee: 10.55 trillion) with inflows for the quarter of $2.1 billion. For the full year 2013, total hedge fund capital invested in EMs increased by nearly $20 billion, on inflows of over $6.4 billion.
While the HFRI Emerging Markets (Total) Index gained 7.1% in the final four months of 2013, the index declined by -2.5% in January on weakness in Eastern Europe and Latin America. The HFRI EM: Latin America Index posted a decline of -1.7% in 4Q, and then fell -6.0% in January, the worst monthly decline since September 2011, albeit outperforming sharp declines in Latin American equity markets, as the Argentine peso plunged over 20%. Similarly, the HFRI EM: Russia/Eastern Europe Index gained 2.3% in 4Q but fell -5.4% in January, also outperforming the broad market drop in Russia and Turkey, as social and civil unrest in Ukraine resulted in conflicts between protesters and government forces.
Hedge fund performance across other emerging markets was mixed through both 4Q and early 2014, with the HFRI EM: Asia ex-Japan Index
gaining 6.7% in 4Q and 10.6% in 2013, despite posting a decline of -1.3% in January. This compared to a decline of nearly -7.0% of Chinese equities in 2013 and a decline of nearly -4.0% in January. Hedge funds investing primarily in the Middle East posted gains in 4Q13, FY13 and January 2014, with the HFRX MENA Index gaining 5.2%, 20.7% and 0.5% in each period, respectively.
EM hedge funds experienced inflows across most regions in 4Q, led by emerging Asia, which experienced inflows of $1.1 billion, while funds investing in Latin America experienced a small outflow of $156 million for the quarter. For FY13, inflows were also led by emerging Asia, which received over $3.0 billion of new capital, bringing hedge fund capital dedicated to emerging Asia to over $45 billion.
“Hedge funds investing in Ukraine and Argentina have been exposed to tremendous volatility in recent weeks, contributing to an intra-emerging market performance decoupling, with funds investing in Emerging Asia, the Middle East and elsewhere in Latin America producing mixed performance through the recent EM-centric volatility,” stated Kenneth J. Heinz, president of HFR. “As developed markets continue to extract economic stimulus measures led by the US Federal Reserve, it is plausible to expect continued volatility in EM in 2014; however, this volatility is likely to create opportunities for hedge funds well positioned to understand these situations and provide liquidity as these dislocations occur. As EM hedge fund capital has again surpassed record levels, global investors are clearly positioning with sophisticated, hedged strategies designed to preserve capital and capture opportunities created by these fluid situations.”
February mostly positive for funds Most hedge funds posted positive results in February, reports GAM, as credit, fixed income and developed market equities rallied and provided a favourable backdrop for event-driven, equity hedge and relative value strategies. Anthony Lawler, portfolio manager at GAM, said that an important positive contributor to these strategies was managers continuing to hold their conviction trades, despite January’s choppy waters. Hedge funds were up 1.6% for February, as measured by the HFRX Global Hedge Fund index in US dollar terms.
“Our view that 2014 was likely to prove to be choppy with more dispersion, and therefore more likely to reward alpha, remained valid in February. So far this year event-driven and equity hedged managers have outperformed broad equity indices,” stated Lawler. Year-to-date through the end of February, the HRFX Event Driven index was up 2.9%
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