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 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 1.62%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, with Asia ex-Japan mandated funds delivering the worst returns, down 2.30% followed by North American and Japanese mandated hedge funds with losses of 1.23% and 1.14% respectively. Among strategies, distressed debt hedge funds posted the best gain, up 1.32% (largely due to idiosyncratic factors – exposure to Puerto Rican debt) while CTA/managed futures posted the steepest loss, down 4.35%.
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.
Figure 1: February 2018 and January 2018 returns across regions
Performance across regional mandates was mixed during the month with Asia leading much of the weakness – Asia ex-Japan managers were down 2.30% with Greater China focused hedge funds down 3.49% while Indian mandated hedge funds lost 1.76% over the same period. Japanese managers have also posted losses, down 1.14% during the month, with the Nikkei 225 ending the month in the red – losing 4.46%. North American and European hedge funds also showed some slack, with losses of 1.23% and 0.78% respectively during the month while beating the MSCI North American AC Index (Local) and the MSCI Europe Index which fell 3.88% and 3.47% respectively in February. On the other hand, Latin American hedge funds lead the tables with gains of 0.66%, as managers’ 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.
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1 49.78% of funds which have reported February 2018 returns as at 14 March 2018