Introduction
Hedge funds witnessed their first decline in seven months, down 0.48% in October. Despite being in the red this month, hedge funds have outperformed underlying markets, with the MSCI AC World Index (Local) losing 1.38% over the same period. While the US Presidential Elections loomed in the background, markets moved in the rhythm of a series of economic data releases as well as central bank meetings this month. The rate hike action from the Federal Reserve seems quite likely as strong US macro data and a hawkish Fed set the stage for tapering in December though the outcome of the Presidential Elections is yet to be seen. Meanwhile global bond markets saw a sell off on the back of strong economic data from the US, UK as well as concerns over a potential end to the ECB’s QE program early next year. The concern remains that with a bottoming out in commodity prices and improving real data, inflation might materialise at a pace not anticipated by major central banks.
On a year-to-date basis, hedge funds are up 2.85%, with roughly 20% of managers posting double digit returns compared with 15% over the same period last year. November will be an interesting month to watch indeed as managers navigate through the markets with bated breath.
Figure 1: October 2016 and September 2016 returns across regions
Performance across regional mandates was mixed during October with Latin American managers leading the table, up 4.07% as manager performance was propped up by the strength in underlying equity markets in Latin America. Japanese managers also had an impressive month, gaining 2.28%, followed by Asia ex-Japan hedge fund managers with a modest 0.08% over the same period. Solid US macro data and a hawkish Fed lent some support to the USD, which gained against major Asian currencies. The Nikkei 225 Index grew close to 6% on the back of a weaker yen. European hedge fund managers ended the month in negative territory, down 0.19% while North American managers posted the steepest decline among regional mandates, losing 0.61% in October. Although showing some slack in performance, North American hedge fund managers outperformed the MSCI North America AC Index (Local) which fell 2.84% over the same period.
On a year-to-date basis, Latin American hedge funds led the tables with gains of 22.05% as the stabilisation in oil and commodity prices throughout the year supported the valuations of underlying Latin American stocks, allowing managers to profit from their long books. Latin American managers have handsomely outperformed underlying emerging markets, represented by the MSCI Emerging Markets Index IMI (Local), which gained 8.66% over the past 10 months. North American hedge funds were also up year-to-date, gaining 4.73%, followed by Asia ex-Japan hedge fund managers who posted year-to-date gains of 2.35%. On the other hand, European and Japanese hedge fund managers fell in negative territory with Japanese managers posting the steepest decline, down 0.92% while European hedge fund managers declined 0.65% year-to-date respectively.
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