Research

Hedge Fund Round Up Q1 2020

Hedge fund managers ended the first quarter of 2020 down 6.42%, while delivering their strongest post-2008 monthly outperformance over the global equity market as represented by the MSCI ACWI IMI. The escalation of the COVID-19 outbreak, which has spread to more than a hundred countries around the globe over the past two months, has weighed on the performance of risk assets in February and March. Concerns over the economic impact of the lockdowns and social distancing measures necessary to curb the spread of the coronavirus tilted the global economic outlook downward, resulting in multiple sell-offs across risky asset classes during the last two months, and hedge funds were not spared.

Figure 1 shows the five worst quarters witnessed by the global hedge fund industry in terms of AUM decline, as well as the asset-weighted performance of hedge fund managers represented by the USD-denominated Mizuho-Eurekahedge Index. Preliminary data for the month of March showed that the hedge fund industry has suffered US$132.6 billion of performance-driven losses, compounded by net investor redemptions totalling US$47.1 billion as of March 2020 year-to-date, bringing the total AUM decline in line with what the industry saw in Q4 2018 and during the global financial crisis of 2008-2009.

Figure 1: Five worst quarters for the global hedge fund industry
Five worst quarters for the global hedge fund industry

Figure 2 illustrates the performance dispersion among hedge fund managers over the last 12 months. The volatile market situation throughout March has resulted in a level of dispersion which draws parallels to the peak of the global financial crisis in October 2008. The significant performance dispersion shown on the figure exemplifies the importance of identifying fund managers who are capable of delivering crisis alpha and downside protection in times of market distress.

Figure 2: Hedge fund monthly return distribution (last 12 months)
Hedge fund monthly return distribution (last 12 months)

Preliminary data shows that a total of 58 fund launches and 143 liquidations have been recorded throughout the first quarter of the year, continuing the trend of closures outpacing launches which has persisted since 2016. Figure 3 below exhibits the annual launches and closures of the global hedge fund industry since 2007.

Figure 3: Annual launches and closures of the global hedge fund industry
Annual launches and closures of the global hedge fund industry

In spite of the overarching muted performance of the hedge fund industry since the beginning of the year, several non-traditional hedge fund strategies have managed to return to the spotlight by delivering better returns amidst the chaotic financial market situation. Fund managers utilising AI/machine learning-based strategies have ended the first quarter of the year flat, as opposed to the average hedge fund manager represented by the Eurekahedge Hedge Fund Index who were down 6.42% over the same period. Trade finance and ILS hedge funds have also ended the quarter with positive, albeit meagre returns, with the Eurekahedge Trade Finance Hedge Fund Index and the Eurekahedge ILS Advisers Index up 0.27% and 0.40% year-to-date respectively.

Figure 4: Performance of AI, trade finance, ILS, long volatility and tail risk hedge funds since end-2009
Performance of AI, trade finance, ILS, long volatility and tail risk hedge funds since end-2009

The elevated market volatility level throughout February and March 2020 has provided an opportunity for long volatility and tail risk hedge fund managers to return into the spotlight, as they topped other hedge fund strategies over the first quarter of the year. The CBOE Eurekahedge Long Volatility Hedge Fund Index and the CBOE Eurekahedge Tail Risk Hedge Fund Index have returned 39.70% and 44.29% year-to-date respectively. The two strategies are designed to provide crisis alpha and tail risk protection for institutional portfolios during periods of extreme market distress.

Table 1: Performance of AI, trade finance, ILS, long volatility and tail risk hedge funds since end-2009

Eurekahedge AI Hedge Fund Index
Eurekahedge Trade Finance Hedge Fund Index
Eurekahedge ILS Advisers index
CBOE Eurekahedge Long Volatility Hedge Fund Index
CBOE Eurekahedge Tail Risk Hedge Fund Index

2010

54.17%

9.04%

7.52%

12.36%

0.10%

2011

16.61%

8.56%

(0.14%)

12.83%

16.39%

2012

1.96%

7.62%

5.93%

0.27%

(21.21%)

2013

14.13%

6.51%

7.61%

(4.44%)

(10.98%)

2014

10.57%

7.25%

5.42%

1.58%

(3.22%)

2015

17.90%

6.28%

4.24%

(1.07%)

(9.51%)

2016

10.16%

6.61%

5.19%

(2.82%)

(11.81%)

2017

8.41%

6.40%

(5.60%)

(10.95%)

(14.22%)

2018

(4.31%)

6.62%

(3.92%)

0.83%

(5.75%)

2019

6.29%

5.03%

0.92%

(10.87%)

(10.40%)

2020 year-to-date

0.02%

0.27%

0.40%

39.70%

44.29%

3-year annualised return

2.06%

5.59%

(3.06%)

5.34%

3.37%

3-year annualised volatility

4.23%

0.81%

5.70%

18.05%

17.59%

3-year Sharpe ratio (RFR = 2%)

0.01

4.44

(0.89)

0.18

0.08

5-year annualised return

6.26%

5.83%

(0.01%)

0.97%

(3.13%)

5-year annualised volatility

4.33%

0.72%

4.57%

14.23%

14.82%

5-year Sharpe ratio (RFR = 2%)

0.98

5.30

(0.44)

(0.07)

(0.35)

Maximum drawdown (5-year)

(7.24%)

(0.74%)

(12.50%)

(24.88%)

(40.89%)

Source: Eurekahedge

In the following section, we spoke with Tom James and John Collis from TradeFlow Capital Management Pte Ltd regarding the performance of their trade finance hedge fund and their expectations for the strategy going forward.

Insights from Tom James (CEO, CIO and co-founder) and John Collis (CLO and co-founder) of TradeFlow Capital Management Pte Ltd

  1. How has the CEMP USD Trade Flow Fund, Eurekahedge Fund ID EH58784, performed as of Q1 2020 year-to-date?
  2. Our USD Fund and EUR Fund have performed well and have remained fully operational during this Black Swan event and global pandemic. They continue to offer investors diversified and stable returns, returning on average +0.45% net per month for our USD Fund and between +0.27% to +0.30% net per month for the EUR Fund (the EUR portfolio was launched in February 2020).

    As a non-lender in this space, we do not lend money to counterparts or give credit terms, instead we enable trades via our pure ownership model, where our Fund owns as a principal the commodity in the transaction during transit and/or agreed storage period and we will even charter the vessels carrying the commodities. During Q1 2020 our risk management framework, which was designed around the 2008/2009 commodity market period was of course tested in a few commodities – particularly the energy space, but performed as designed and protected the Fund against potential price risk exposure in the unlikely event of an end buyer default. Our Fund has not experienced any end buyer counterpart defaults.

  3. COVID-19 has disrupted global supply chains and is posing a significant challenge to the real economy, in particular small to medium-sized business. How do you anticipate the ongoing situation to play out for trade finance hedge funds?
  4. Governments also understand that SME-sized businesses are critical to the economy and have pledged a lot of support for them in recent special budgets. Across the world, governments have put in place schemes to support SME businesses during this period and its effects on trade. Notwithstanding those efforts, trade and consumption have diminished and there has been a rise in insolvencies. Calls have been made on loans across the global supply chain and those have not all been met. The overall picture is one of tightening credit for SMEs. Aside from the relief schemes put forward by governments, anecdotally we are aware that there is less credit available and what there is, is now being charged for at higher rates. The overall picture is one of extended credit times, i.e. longer debtor days before payment, and together with lockdown-caused reductions in consumption and higher rates for existing borrowers will lead to more non-performing loans in the short term.

    TradeFlow Funds however, via its pure ownership non-lending approach, focus specifically on bulk commodity existing supply chain transactions and not finished goods. As these are the most basic elements of the supply chain, i.e. bulk agricultural foodstuffs, energy and other raw materials, we do not anticipate significant changes for the TradeFlow Funds or their SME counterparts.

  5. Are there concerns over asset quality and the value of collateral in light of declining commodity prices and weaker economic growth projections?
  6. We expect that for strategies relying on the credit quality of banks or insurance companies guaranteeing credit risk/performance risk on trades in their portfolio, there could be some concerns over the quality of those guarantees going forward as we have even seen some sovereign nations get downgraded like the United Kingdom due to the COVID-19 situation.

    The TradeFlow Funds don't rely on external guarantees, they rely on owning the bulk physical commodities in transactions as this is the primary risk mitigation approach used by the funds to ensure that in the unlikely event of an end buyer default, they can recoup their investment in the transaction quickly through the resale of the commodity into the spot or forward physical markets.

    Extended supply lines and credit issues both upstream and downstream will have knock-on effects, and those who have lent against speculative trades in commodities may see their credit stretched in periods of lower consumption that have been caused by the disease or lockdown. But against that, basic consumable commodities will continue to be consumed and where there are shortfalls, in areas where labour has not enabled harvesting or processing, arable and meat products for instance, there may be price rises over the short term. Following the COVID-19 lockdowns, the various stimulus packages should produce a renewed consumption and use of commodities.

***

Figure 5 illustrates the performance of the Eurekahedge Greater China Hedge Fund Index against the Hang Seng Index, the Shanghai Composite Index, as well as the Shenzhen Composite Index. Hedge fund managers focusing on Greater China, the initial epicentre of the COVID-19 pandemic, were down 7.05% in March, dragging their year-to-date loss to 6.81% over the first quarter of 2020.

Figure 5: Performance of the Eurekahedge Greater China Hedge Fund Index since end-2009
Performance of the Eurekahedge Greater China Hedge Fund Index since end-2009

Despite the sharp losses they suffered in 2018 and 2020, Greater China hedge fund managers have managed to outperform the three equity benchmarks in risk-return statistics over the last three and five years, while registering smaller maximum drawdown as shown in the table below.

Table 2: Performance of the Eurekahedge Greater China Hedge Fund Index since end-2009

Eurekahedge Greater China Hedge Fund Index
Hang Seng Index
Shanghai Composite index
Shenzhen Composite Index

2010

9.12%

5.32%

(14.31%)

7.45%

2011

(13.30%)

(19.97%)

(21.68%)

(32.86%)

2012

12.28%

22.91%

3.17%

1.68%

2013

18.95%

2.87%

(6.75%)

20.03%

2014

8.60%

1.28%

52.87%

33.80%

2015

10.72%

(7.16%)

9.41%

63.15%

2016

(3.94%)

0.39%

(12.31%)

(14.72%)

2017

28.27%

35.99%

6.56%

(3.54%)

2018

(13.03%)

(13.61%)

(24.59%)

(33.25%)

2019

16.66%

9.07%

22.30%

35.89%

2020 year-to-date

(6.81%)

(16.27%)

(9.83%)

(3.31%)

3-year annualised return

4.03%

(0.71%)

(5.14%)

(5.70%)

3-year annualised volatility

11.02%

17.44%

14.63%

20.10%

3-year Sharpe ratio (RFR = 2%)

0.18

(0.16)

(0.49)

(0.38)

5-year annualised return

4.07%

(1.06%)

(6.00%)

(3.37%)

5-year annualised volatility

13.61%

18.40%

21.32%

29.79%

5-year Sharpe ratio (RFR = 2%)

0.15

(0.17)

(0.38)

(0.18)

Maximum drawdown (5-year)

(18.37%)

(28.23%)

(45.92%)

(54.61%)

Source: Eurekahedge

Figure 6 provides the Greater China hedge fund industry AUM and asset flows data since 2008. Preliminary data based on 31.87% of funds which have reported March performance showed that US$0.4 billion of performance-based decline and US$0.3 billion of net inflows have been recorded by the mandate year-to-date, bringing the industry’s total assets to US$30.2 billion.

Figure 6: Annual asset flows and AUM of the Greater China hedge fund industry
Annual asset flows and AUM of the Greater China hedge fund industry

The market risk-off sentiment arising from the COVID-19 outbreak escalation in February and March has exerted significant pressure for UCITS hedge funds, which typically provide higher liquidity compared to their non-UCITS counterparts. The figure below illustrates the performance of the Eurekahedge UCITS Hedge Fund Index and the Eurekahedge ex-UCITS Hedge Fund Index – a custom index comprising the non-UCITS compliant hedge funds in the Eurekahedge database. It could be seen from the performance gap between the two indices that UCITS hedge funds have been underperforming their non-UCITS peers in exchange for the ability to provide greater liquidity.

Figure 7: Performance of the Eurekahedge UCITS Hedge Fund Index since end-2009
Performance of the Eurekahedge UCITS Hedge Fund Index since end-2009

The Eurekahedge UCITS Hedge Fund Index has slumped 11.41% as of March 2020 year-to-date, more than doubling the losses recorded by non-UCITS hedge funds over the same period. Table 3 below provides the yearly performance of the two indices shown in the figure above, as well as their risk-return profile over the last three and five years.

Table 3: Performance of the Eurekahedge UCITS Hedge Fund Index since end-2009

Eurekahedge UCITS Hedge Fund Index
Eurekahedge ex-UCITS Hedge Fund Index

2010

7.87%

12.22%

2011

(6.82%)

(1.42%)

2012

7.73%

7.45%

2013

7.14%

10.12%

2014

2.70%

5.35%

2015

0.58%

2.74%

2016

2.63%

5.70%

2017

8.18%

11.25%

2018

(7.23%)

(4.13%)

2019

9.01%

9.44%

2020 year-to-date

(11.41%)

(5.25%)

3-year annualised return

(2.01%)

2.46%

3-year annualised volatility

6.60%

4.52%

3-year Sharpe ratio (RFR = 2%)

(0.61)

0.10

5-year annualised return

(0.77%)

3.11%

5-year annualised volatility

5.92%

4.05%

5-year Sharpe ratio (RFR = 2%)

(0.47)

0.27

Maximum drawdown (5-year)

(12.02%)

(6.08%)

Source: Eurekahedge

Figure 8 provides the UCITS hedge fund industry AUM and asset flows breakdown since 2008. As of March 2020 year-to-date, US$14.6 billion of performance-driven losses and US$10.1 billion of net investor redemptions have been recorded by UCITS fund managers, bringing the industry total assets to US$209.4 billion.

Figure 8: Annual asset flows and AUM of the UCITS hedge fund industry
Annual asset flows and AUM of the UCITS hedge fund

This section of the report draws a comparison between long/short equities hedge funds and their liquid alternative ETF counterparts. ETFs available to retail investors are typically subjected to stricter regulations such as limitations on employing leverages and short-selling assets, in comparison to hedge funds which are typically available only to high-net-worth individuals and institutional investors.

Figure 9 below provides a performance comparison for the Eurekahedge Long Short Equities Hedge Fund Index against a composite index representing actively-managed ETFs employing similar strategies, as well as the underlying global equity market.

Figure 9: Performance comparison between equity hedge funds and alternative ETFs
Performance comparison between hedge funds and alternative ETFs

Table 4 provides the annual performance and risk-return statistics of the indices shown in Figure 9 above. Hedge fund managers utilising long/short equities strategy were down 10.49% as of March 2020 year-to-date, outperforming both the underlying equity market and their ETF counterparts which were down 21.38% and 24.81% respectively over the same period.

Table 4: Performance comparison between equity hedge funds and alternative ETFs

Eurekahedge Long Short Equities Hedge Fund Index
Long Short Equities ETF Composite
MSCI ACWI IMI (Local)

2015

3.66%

0.27%

(0.52%)

2016

3.87%

12.42%

7.33%

2017

13.05%

15.92%

17.51%

2018

(6.26%)

(8.84%)

(10.10%)

2019

11.24%

11.32%

23.49%

2020 year-to-date

(10.49%)

(24.81%)

(21.38%)

3-year annualised return

0.55%

(5.18%)

(0.80%)

3-year annualised volatility

7.00%

15.01%

14.39%

3-year Sharpe ratio (RFR = 2%)

(0.21)

(0.48)

(0.19)

5-year annualised return

1.89%

(0.37%)

0.92%

5-year annualised volatility

6.41%

12.55%

13.06%

5-year Sharpe ratio (RFR = 2%)

(0.02)

(0.19)

(0.08)

Maximum drawdown (5-year)

(10.49%)

(26.89%)

(21.38%)

Source: Eurekahedge

Table 5 provides the correlation matrix for the five indices shown in the table above. The performance of both long/short equities hedge funds and ETFs are strongly correlated to the global equity market, reflecting the common portfolio bias toward the long side among these funds.

Table 5: Correlation matrix - equity hedge funds and alternative ETFs
Eurekahedge Hedge Fund Industry Q1 2020 Highlights Correlation Matrix

Source: Eurekahedge

Table 6 provides the equity market beta exposure of the hedge fund and ETF indices since the end of 2014. The Eurekahedge Long Short Equities Hedge Fund Index has recorded a beta of 0.46 against the MSCI ACWI IMI while delivering an excess return of 0.12% per month. On the other the Long Short Equities ETF Composite has derived a bigger portion of its returns from market exposure, with a beta of 0.89 and excess return of -0.13% over the same period.

Table 6: Alpha and Beta of equity hedge funds and alternative ETFs against the MSCI ACWI

Eurekahedge Long Short Equities Hedge Fund Index
Long Short Equities ETF Composite

Beta

0.46

0.89

Average return

0.22%

0.06%

Alpha

0.12%

(0.13%)

Source: Eurekahedge

The full article inclusive of all charts and tables is available in The Eurekahedge Report accessible to paying subscribers only.

Subscribers may continue to login as usual to download the full report and non-subscribers may email database@eurekahedge.com to enquire on how to obtain the full research report.