Not the start we’d hoped for – can funds march on after dire early 2016 performance?


Not the start we’d hoped for – can funds march on after dire early 2016 performance?

Deplorable weather, compounded by weeks of bothersome, socially-prescribed abstinence, all endured to the wailings of that tubby crooner, Adele.

Meanwhile, your fund haemorrhages like a mouse in a blender as the next major financial crisis plots its arrival in time for the next bonus round. Good riddance to January and February 2016.

In can only get better from here, or at least a bruised hedge fund industry will be collectively willing this to be the case after making one of the poorest starts to the year since 2008.

Aggregate fund returns came in at -0.32% during February, according to the HFRX Global Hedge Fund Index, recovering ground from January’s -2.7% decline.

So, signs of recovery at least, though perhaps not enough to assuage the fears of investors whose $21.5bn of redemptions in January was the largest volume recorded for the opening month of the year since 2009.

AIG, well known for its shrewd financial maneuvering, leaked plans to slash its hedge fund portfolio in half amid concerns over rising volatility.
The withdrawals have been felt – in January global HF assets fell below the $3 trillion threshold for the first time since May 2014.

Blood on the trading floor

Managers have had a torrid time, however spare a thought for Citadel employees, a dozen of whom were given their marching orders after the fund finished the first six weeks of the year down 6.5%.

Despite the recent addition of Ben Bernanke to the cockpit, it transpired the Absolute Return “2015 Management of the Year” winner wasn’t too big to fail as it took a big hit to its Wellington and Kensington multi-strategy funds.

6.5% pales into comparison, however, with the 19.9% loss chalked down by Pershing Square Holdings for the first two months of the year. Ouch.

The 2015 overhang

Pershing’s tale is a familiar one, albeit an extreme version. The firm was riding high through the middle of last year, up 8% YTD by mid-August when things starting to turn sour – around the time of Chinese Black Monday.

In this sense January’s losses can really be viewed an extension of H215’s malaise as
Pershing, like many of its peers, has struggled to recalibrate its strategy to a new financial climate.

Indeed, equity-focused funds have unsurprisingly borne the brunt of the recent losses. The HFRX Equity Hedge Index posted a YTD decline of -4.13%, while the HFRX Fundamental Value Index slipped -3.17%. Slowing capital markets activity put a further dent put in overall performance: the HFRX Event Driven Index was down
-2.68% in early March.

The only way is up

January and February 2016 will go down on record as a black spot in hedge fund industry, but how much can we read into these figures?

Hopefully not a huge amount: alternatives have historically been slow to move into gear after the holiday excesses, while allocations have been negative every January bar one since 2008. This is due to redemptions being carried over from the previous year.

February is usually a relatively strong bellwether as far as the year’s performance goes – though not every firm covered itself in glory over the month, the majority appear to be doing a fairly good job of plugging the leak.

Respite from recent volatility has helped going into March, and even the most inobservant of portfolio managers can’t fail to gauge the way commodities, interest rates and the other key indicators are moving.

That said, with BREXIT looming large and ISIS more restless than an ADHD-riddled teenager with a confiscated iPhone, there are plenty of potential pitfalls to navigate over the coming months.

One thing’s for sure, someone will be making money somewhere. Here’s hoping it’s you.

Written by William Hodges.

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