Hedge Funds Ride the Storm in October

by Zack Breeze

  • 06 Dec 2018
  • HF

October was undoubtedly a tough month for hedge funds: the Preqin All-Strategies Hedge Fund benchmark returned -2.52% for the month, the worst monthly return since January 2016 (-2.81%). This can be attributed to the sharpest one-month decline of global equity markets since May 2012, in which the S&P 500 Index produced a return of -6.94% for October, marking a significant drawdown outweighing that of hedge funds. Contributing factors for this global decline include US-based investors’ concerns over the durability of the economic cycle, and the uncertainty surrounding the Italian Government’s 2019 budget proposal which was recently rejected by the European Commission.

While the performance of hedge funds was substandard in October, the returns were not consistent across all strategies; this is evident when examining the interquartile ranges and medians of each of the top-level strategy benchmarks, as shown in the chart below.

Equity, macro and credit strategies benchmarks returned -3.69%, -0.24% and -0.30% respectively for the month, revealing further disparity among strategies in terms of their benchmark returns and interquartile ranges. It comes as no surprise that a large portion of equity strategies funds endured a negative month; however, all other strategy benchmarks returned positive upper-quartile figures, alongside low but somewhat higher median figures.

In particular, strategy benchmarks with lower correlation to global markets (the S&P 500 Index) performed better. Macro strategies recorded three-year rolling correlation to the S&P 500 of 0.48 for October, compared with 0.86 for equity strategies hedge funds. This could point to more correlated strategies suffering not only the greatest losses, but also the widest spread of returns. Equity strategies returns produced the highest interquartile range in October at 5.75%, which compares starkly with credit strategies’ interquartile range of 1.41% and correlation to the S&P 500 of 0.58.

Given that 47% of all hedge funds are equity focused, the Preqin All-Strategies Hedge Fund benchmark is heavily influenced by equity strategies funds. When removing these funds from the picture, the overall median return is much higher and the spread of returns smaller, as the chart shows. Furthermore, when looking at returns across all strategies, just 16% of equity strategies funds returned positively for October, while 47% and 45% of credit and macro strategies funds respectively generated positive returns.

Volatility figures further highlight the differences between the top-level strategies, with credit and macro strategies funds boasting 12-month volatility figures of 1.24% and 2.68% respectively – each less than a quarter of the S&P 500’s 12.15% volatility figure over the same period. In fact, the S&P 500 volatility figure is over double the volatility of equity strategies (5.70%), which is  the highest of any strategy.

Such differences largely reflect the inherent characteristics of individual strategies, offering great variety in the level of downside protection and correlation to global markets, as well as lower volatility in comparison to global markets. While some strategies suffered, less correlated strategies managed to weather the storm and produce respectable results, and all of them offered excellent downside protection against global market distress.

To see more data from October and compare it to the returns generated in subsequent months, follow this link.

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