Stellar Performance by Equity Strategies Drives Hedge Fund Gains

Hedge funds returned +11.48% in Q2 2020 as global markets rebounded

Hedge funds bounced back over Q2 2020 after a disappointing first quarter. The asset class returned +11.48% over the three months, the highest quarterly return since Q2 2009 (+14.62%). As lockdown restrictions for COVID-19 began to ease in many parts of the world, hedge funds capitalized on the rise in stock markets that resulted from government interventions and increases in consumer spending. 

While hedge fund investors will be encouraged by this performance, returns for the asset class are still slightly negative for the first half of 2020. Hedge funds posted a loss of 0.37% in H1 2020, with Q2 gains not able to offset a monthly loss in March greater than that seen at the height of the Global Financial Crisis. Even though they are underwater, hedge funds have performed better than public markets. Driven by a loss of 20.00% in Q1, the S&P 500’s H1 2020 return stood at -4.04%, with gains of 19.95% in Q2 2020 failing to bring the index back to December 2019 levels.

Equity and Event Driven Strategies Outperform
Although the asset class performed well overall, there were clear winners and losers over Q2 in terms of strategy, while hedge funds across all regions displayed strong performance. 

Equity strategies hedge funds were the standout performers, posting +14.65% in Q2, the highest return of any top-level hedge fund strategy. Their return is also over three percentage points higher than that of the Preqin All-Strategies Hedge Fund benchmark (+11.48%). 

Event driven strategies were the only other top-level strategy to outperform the asset class benchmark, delivering +11.70% for the quarter. Over June 2020, event driven strategies posted net returns of +2.73%, behind only equity strategies. Although signs of an economic recovery are emerging, many companies face serious challenges in the wake of the pandemic. Event driven funds have capitalized on arbitrage opportunities in situations involving distressed business, M&A, and recapitalizations. 

But CTAs Struggled
CTAs recorded the highest returns among top-level hedge fund strategies in Q1 2020 but struggled considerably over Q2. CTAs posted a net return of +0.47% over the quarter, while funds of CTAs returned -3.80% in the same period. This comes after a particularly bad May and June for systematic CTAs, which lost 0.82% and 0.27% respectively. 

At +6.19%, alternative mutual funds returned the next lowest figure of all hedge fund strategies, as the chart above shows. 

Emerging Markets Flourished
Over Q2, hedge funds focused on emerging markets posted strong returns, gaining 12.85%. With this return, emerging markets-focused funds significantly outperformed their developed market counterparts, which gained 8.87% in the period. 

Asia-Pacific-focused hedge funds also performed well over Q2, returning +11.83%, and in June 2020 posted the highest return of any top-level region (+3.30%). As the first region to feel the full economic effects of COVID-19, lockdown measures were relaxed in Asia-Pacific earlier than in other regions, with stock markets reflecting the growing levels of consumption. 

Don’t Call it a Comeback
The improved market conditions have allowed hedge funds to make significant gains over the second quarter of 2020. Such positive returns have helped to eradicate the losses seen in Q1. Over the second half of the year, market participants will be hoping to see hedge funds build on the outperformance. But with growing concerns over second waves of coronavirus infections, hedge funds are likely to face further turbulence over H2 2020.

Read our Q2 Quarterly Update to learn more about how hedge funds fared during the second quarter of the year.

For more insights and analysis on the impact of the pandemic on alternative assets, take a look at our COVID-19 Knowledge Hub.