Research

Introduction

January was a happy start to the year for hedge funds, with the Eurekahedge Hedge Fund Index up 2.20%¹ in January. Meanwhile, underlying markets as represented by the MSCI AC World Index (Local) gained 3.78% over the same period. As the global risk on mode continues into January, trend following managers were positioned in good stead with holdings into equities and oil among performance contributors. Equity markets strengthened following the passing of tax reform in December, resulting in an increase of investments which drove US equities to all-time highs. Over in Europe, the growth momentum appears to be going strong with a strengthening Euro adding to gains for foreign investors in the region. Yield on sovereign bonds, particularly the Gilt and German bund, ended higher in January backed by positive signs of German coalition talks. Emerging markets led by Russia, China and Brazil have also contributed to strong gains for hedge fund managers as global risk appetite remains strong, with a weakening USD favouring exposure to EM markets where valuations remain relatively cheap. Among regional mandates, Latin American hedge fund managers topped the tables, gaining 4.47% while CTA/managed futures managers posted the best returns, up 3.54% among strategic mandates.

While full figures for February 2018 returns will start rolling in towards month-end, the recent spike in volatility has brought an end to the Trump rally. Short-volatility hedge fund strategies will likely see substantial losses in February, while tail-risk and long volatility strategies will finally see some redemption following double-digit losses during the exceptionally calm markets of 2017. If however this volatility spike is short-lived and the VIX trends lower towards the month end, then long volatility managers will see their winnings get trimmed.

Figure 1: January 2018 and December 2017 returns across regions
 

All regional mandates started the year on a positive note, with Latin American managers topping the table, up 4.47%. The uptrend in oil prices which reached US$70 a barrel, combined with a weak US dollar supported performance of managers overseeing emerging mandates. Asia ex-Japan mandated hedge funds were also in positive territory this month, gaining 3.72% with underlying Greater China focused hedge funds posting an impressive performance, up 7.82%. North American hedge fund managers gained 1.76% followed by Japanese and European mandated hedge funds with gains of 1.40% and 1.36% respectively. 2017 saw Asia ex-Japan leading the table, returning 7.97% followed by Latin America with gains of 6.56%. Indeed, we feel that Asia ex-Japan’s ‘fall from grace’ was a result of the markets catching up with economic fundamentals as concerns over developed markets hawkish moves culminated into investor panic. European focused hedge funds were at the bottom of the table last year, posting a modest return of 0.69% in 2017.

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