Indices

Hedge fund industry heavy weights post the worst monthly loss since the May 2010 flash crash

Global markets underwent a sharp and speedy correction in February which saw equity markets post steep losses as investors prepared for a faster than expected interest rate hike in the US. The average return of the global hedge fund industry was pulled into negative territory in February as markets experienced sharp reversals, with trend following CTA/managed futures and long/short equities strategies lagging behind the pack. Hedge funds registered their first monthly loss of the year with the Eurekahedge Hedge Fund Index down 1.64%1 in February as volatility levels spiked across the board and unravelled the volatility risk premium trade. Despite steep losses during the month, hedge funds have protected on the downside and managed to outperform underlying markets as the MSCI AC World Index (Local) declined 3.68% in February. Returns were largely negative across the board with all key regional mandates in the red during the month. Asia ex-Japan mandated funds delivered the worst returns, down 2.11% followed by North American and Japanese mandated hedge funds with losses of 1.34% and 1.23% respectively. Among strategies, distressed debt hedge funds posted the best gain, up 0.81% (largely due to idiosyncratic factors - exposure to Puerto Rican debt) while CTA/managed futures posted the steepest loss, down 4.49%. Trading conditions are likely to remain choppy for the rest of the year with VIX levels still elevated from their all-time lows. While the market consensus appears to be favouring an aggressive rate hiking cycle in the US and an overall tapering in global liquidity conditions as the Fed and ECB normalise interest rate policy, it is perhaps too soon to write off the doves in the US Fed. Headwinds to global growth from a trade war, as well as tariffs feeding into the US inflationary cycle in an adverse way would make it much more difficult for the Fed to normalise policy without rocking the boat too much – and by most counts, February was just the teaser.

Below are the key highlights for the month of February 2018

Hedge funds lost 1.64% in February though outperforming underlying markets as represented by the MSCI AC World Index (Local) which was down 3.68% over the same period. On a year-to-date basis, managers gained 0.34% while underlying markets were down a modest 0.03%. CTA/managed futures hedge funds posted their worst monthly return on record, down 4.49% in February with underlying trend following and commodity focused strategies declining 7.85% and 1.27% - upending the gains posted by dedicated FX focused strategies which were up 1.26% during the month. Among developed market mandates, North American managers posted the steepest losses during the month, down 1.34% followed by Japanese and European managers which posted losses of 1.23% and 0.73% respectively. The Eurekahedge Billion Dollar Hedge Fund Index which tracks the performance of the hedge fund industry heavy weights was down 1.96% in February, their steepest monthly loss on record since the infamous May 2010 flash crash when billion dollar hedge funds lost 2.01%. Asia ex-Japan mandated hedge funds posted the steepest decline among regional mandates during the month, down 2.11% with underlying Greater China hedge fund managers down 3.05%. Long/short equity funds focused on the region declined 3.41% as Chinese equity markets came under pressure during the month led by weaknesses in the ‘financials’ sector. The CBOE Eurekahedge Short Volatility Hedge Fund Index declined 3.90% in February based on early numbers, with asset weighted losses for the index coming in at 8.65% and expected to increase as the complete picture emerges. Meanwhile, tail risk and long volatility focused strategies are up 6.16% and 0.90% on an asset weighted basis. The Eurekahedge Crypto-Currency Hedge Fund Index declined 16.83% in February, bringing its year-to-date losses to 24.36%, barely ahead of the 26% decline in the price of Bitcoin in the first two months of 2018.

Index of the Month	Feb 2018*	2018 Returns	2017 Returns
CBOE Eurekahedge Short Volatility Hedge Fund Index	-3.90	-6.03	9.07

Main Indices

Main Eurekahedge Indices	Feb 2018*	2018 Returns	2017 Returns
Eurekahedge Hedge Fund Index	-1.64	0.34	9.43
Eurekahedge Fund of Funds Index	-1.64	0.44	6.73
Eurekahedge Long-only Absolute Return Fund	-2.42	0.92	24.36
Eurekahedge Islamic Fund Index	-1.57	0.47	5.96

Regional Indices

Eurekahedge Regional Indices	Feb 2018*	2018 Returns	2017 Returns
Eurekahedge North American Hedge Fund Index	-1.34	0.19	8.57
Eurekahedge European Hedge Fund Index	-0.73	0.59	6.96
Eurekahedge Eastern Europe & Russia Hedge Fund Index	0.51	8.61	10.88
Eurekahedge Japan Hedge Fund Index	-1.23	0.27	13.19
Eurekahedge Emerging Markets Hedge Fund Index	-1.10	2.56	17.00
Eurekahedge Asia ex Japan Hedge Fund Index	-2.11	1.29	20.83
Eurekahedge Latin American Hedge Fund Index	0.72	4.43	13.92

Performance across regional mandates was mixed during February with Asia leading much of the weakness. Asia ex-Japan managers lost 2.11% with Greater China focused hedge funds down 3.05% while Indian mandated hedge funds declined 1.76% over the same period. Chinese markets ended the month in the red with the CSI 300 Index losing 5.90% during the month. Japanese managers also posted losses of 1.23% during the month as the Nikkei 225 Index ended the month in the red – down 4.46% partly due to the Yen rally as a result of speculation that the Bank of Japan might start to normalise monetary policy. Although North American and European hedge funds showed some slack, down 1.34% and 0.73% respectively during the month, managers were still able to beat the MSCI North American AC Index (Local) and the MSCI Europe Index which fell 3.88% and 3.47% respectively in February. The DJIA and SP 500 declined 4.28% and 3.89% respectively while in the EU, the DAX and the CAC lost 5.78% and 2.94%. Meanwhile, oil and commodity prices declined as the dollar gained ground against a basket of currencies, which further dented returns for emerging markets focused managers with the Eurekahedge Emerging Markets Hedge Fund Index down 1.10% during the month. On the other hand, Latin American hedge funds lead the tables with gains of 0.72% during the month, as manager performance was propped up by the strength in underlying equity markets in Latin America particularly in Brazil as its central bank cuts interest rates again.

Strategy Indices

Almost all strategic mandates ended the month of February in the red with the exception of volatility arbitrage, distressed debt and short-term FX trading strategies. CTA/managed futures posted the steepest loss during the month - down 4.49%, a far cry from their strong performance in January. This reversal places CTAs back as the only hedge fund strategy which is in the red on a year-to-date basis, down 1.52% for the year. The severe reaction against established trends in the equities, energy and US bond markets early during the month resulted in losses for many trend following programs as their risk limits were triggered. Managers in the CTA space reported steep losses from their long exposure to Asian, North American and European equity index futures, while long positions in the commodities and energy sector also contributed to losses. Commodity-focused hedge funds declined 1.27% during the month as crude oil prices fell, affecting long exposure into energy as the dollar rallied and stock prices dropped during the month. Long exposure into precious metals was also a performance detractor thanks to a strengthening dollar. Meanwhile, underlying FX-focused hedge funds were up 1.26% during the month, with managers reporting gains on long USD positions against emerging market currencies and short USD positions against Yen as the USD Index gaining 1.70% for the month. The Eurekahedge FX Hedge Fund Index is up 0.97% for the year.

Long/short equities managers were also in negative territory, with losses of 1.20% as global equity markets plummeted across the board in February. Among regional mandates within this strategy, Asian long/short equity managers posted losses of 1.99%, followed by North American long/short equity managers who were down 1.34%. Greater China long/short equities hedge funds, a heavyweight in the Asian long/short equity index declined 3.41%, posting the worst performance across Asian single-country long/short equity mandates during the month. Macro mandated hedge funds were also negative, declining 0.95% in February although some macro funds with long exposure into the Yen reaped gains during the month. Multi-strategy and fixed income hedge funds also languished in February with losses of 0.89% and 0.61% respectively. Event driven hedge fund managers also posted losses – down 0.54% as exposure into energy and telecommunications sectors were among performance detractors for managers while relative value managers also posted losses of 0.32% during the month.

Among the suite of CBOE Eurekahedge Volatility Indexes, long volatility managers pocketed good gains – up 0.35% during the month as overall volatility levels continue to rise with the CBOE VIX climbing from 22.6 to 46.6 in February. Relative value volatility hedge funds were also up with gains of 0.39%. On the other hand, short volatility managers posted the steepest decline, down 3.90% as the outlook on the global economy tumbled and volatility levels saw a return in the market. While the returns for the CBOE Eurekahedge Tail Risk Index are still being populated, early figures show that the strategy is down 2.95% in February. This is quite surprising and rather uncharacteristic of the tail risk index, but can be explained away on account of steep losses posted by one of the constituents for this ‘equal weighted index’. This anomaly is eliminated when viewing the asset weighted returns for the tail risk index in February, by which count the index is up 6.19% during the month. As more of the constituents report in, this number is likely to be revised higher.

Table 1: Index Flash Strategy Return Map

Eurekahedge Strategy Indices	Feb 2018*	2018 Returns	2017 Returns
Eurekahedge Arbitrage Hedge Fund Index	0.65	1.31	5.08
Eurekahedge CTA/Managed Futures Hedge Fund Index	-4.49	-1.52	2.11
Eurekahedge Distressed Debt Hedge Fund Index	0.81	2.82	6.23
Eurekahedge Event Driven Hedge Fund Index	-0.54	0.70	10.26
Eurekahedge Fixed Income Hedge Fund Index	-0.61	0.35	6.20
Eurekahedge Long Short Equities Hedge Fund Index	-1.20	1.26	12.60
Eurekahedge Macro Hedge Fund Index	-0.95	0.78	3.64
Eurekahedge Multi-Strategy Hedge Fund Index	-0.89	0.92	10.96
Eurekahedge Relative Value Hedge Fund Index	-0.32	0.05	5.77
CBOE Eurekahedge Long Volatility Hedge Fund Index	0.35	-0.04	-10.95
CBOE Eurekahedge Relative Value Volatility Hedge Fund Index	0.39	0.35	3.23
CBOE Eurekahedge Short Volatility Hedge Fund Index	-3.90	-6.03	9.07
CBOE Eurekahedge Tail Risk Hedge Fund Index	-2.95	-2.32	-14.22
Eurekahedge Equity Long Bias Hedge Fund Index	-1.76	1.54	17.09
Eurekahedge Equity Market Neutral Hedge Fund	0.03	0.97	3.85
Eurekahedge Trend Following Index	-7.85	-2.63	0.53
Eurekahedge FX Hedge Fund Index	1.26	0.97	-0.26
Eurekahedge Commodity Hedge Fund Index	-1.27	0.55	1.38

Eurekahedge Global Hedge Fund Indices by Fund Size	Feb 2018*	2018 Returns	2017 Returns
Eurekahedge Small Hedge Fund Index (< US$100m)	-1.49	0.48	9.69
Eurekahedge Medium Hedge Fund Index (US$100m - US$500m)	-1.59	0.51	9.10
Eurekahedge Large Hedge Fund Index (> US$500m)	-1.99	-0.31	6.65
Eurekahedge Billion Dollar Hedge Fund Index	-1.96	-0.35	5.82

Mizuho-Eurekahedge Indices	Feb 2018*	2018 Returns	2017 Returns
Mizuho-Eurekahedge Index - USD	-2.57	0.21	8.69
Mizuho-Eurekahedge TOP100 Index - USD	-2.37	0.09	6.76
Mizuho-Eurekahedge TOP300 Index - USD	-2.48	0.13	7.76

Asia-Eurekahedge Indices	Feb 2018*	2018 Returns	2017 Returns
Eurekahedge Greater China Hedge Fund Index	-3.05	3.04	29.75
Eurekahedge India Hedge Fund Index	-1.76	-2.08	28.96

* Based on 44.39% of funds which have reported February 2018 returns as at 13 March 2018

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Footnotes