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Gains or Pains? The Performance of Equity Strategies Hedge Funds in Evolving Markets

by Ibrahim Mir

  • 10 Jul 2019

Traditional markets have experienced a reversal of fortune in 2019. Following on from a turbulent end to 2018, the S&P 500 Index has gained 600 points to reach a record high as of 3 July 2019. These trends can be attributed to various macroeconomic factors and movements in the business cycle. How has this impacted hedge funds?

After poor performance towards the end of 2018, investors have largely been reticent in their hedge fund investment, recording total industry withdrawals of $22.1bn in Q1 2019. The recent performance gains in 2019, however, have driven hedge fund assets under management (AUM) from $3.45tn in Q4 2018 to $3.56tn as of the end of Q1 2019.

Perhaps the most stated characteristic of hedge funds is their low correlation to traditional markets. However, for hedge funds that employ an equity strategy, this characteristic is often overstated. Equity strategies hedge funds have a strong degree of correlation to traditional markets, illustrated by a three-year trailing correlation of 0.90.

 

Equity Strategies Make Strides
Equity strategies have been the best performing top-level hedge fund strategy for 2019 YTD, making gains of 6.88%, with particularly strong gains in developed markets. North America-focused hedge funds are up 8.03% since the start of the year. At the same time, Europe-focused hedge funds have gained 4.36%. Why such a disparity between these two developed regions?

Concerns over the China-US trade war have eased, with talks resuming. Meanwhile, US interest rates have held steady and the business-friendly policy from the Trump administration has led to strong gains for North America-focused equity strategies hedge funds. As the rising uncertainty around Brexit affects UK and European markets, with many investors deferring their investments or looking to increase their exposure to other markets, Europe-focused hedge funds have struggled to reach the heights of their North America-focused counterparts. Industrial data from the powerhouse Germany looks weak, with the country narrowly avoiding a recession which would reverberate around Europe.

Resurgence of Latin American Funds
Taking a closer look at equity strategies hedge funds focused on emerging markets, those targeting investment in Latin America have gone against the trend. At the end of 2018, such funds were up 13.65% while all other regions were down. A similar pattern emerges in April 2019, as the chart above shows, whereby gains have begun to diminish across all regions except Latin America where they have begun to pick up.

Exposure to the Latin American market predominantly takes the form of investing in Brazil. Hedge fund AUM in Brazil has grown by 28.2% from Q4 2018 to Q1 2019, with growth opportunities and a stabilizing economy attracting increasing interest from investors.

Given the resurgence in the performance of equity strategies in the first half of 2019, what does the future hold? Equity strategies hedge funds across the globe will experience consolidation of returns, leading to the possible rebalancing of portfolios. The impact of this remains to be seen, but the adage rings true: past performance is not indicative of future results.

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