Hedge fund performance mixed for October - rationalization coming at year-end

October hedge fund performance did not match the strong returns in equities. These strategies are not suppose to have high returns in a strong directional month. Betas are just lower for these strategies and alpha is sometimes harder to come by in pure directional up markets. 

As should be expected, the market directional category did well albeit it was less than half of the S&P  500 move. Surprisingly, special situations and event driven strategies both performed well. The global macro and CTA index were the worst performers for the month while diversified multi-strategy funds showed good gains. 

For the year, merger, market neutral, and absolute return were the best strategies while event driven, distressed, and special situations have been the worst strategies for 2015. Interestingly, the best for the month have been the worst for the year.

With fixed income flattish for the year and equities moving back into positive territory for the year only this month, hedge funds have shown mixed absolute and relative success for the year. A number of strategies are strongly negative and unlikely to turn positive for the year unless there are returns that are greater than one annualized standard deviation. It is hard to expect managers to make that performance in a sixty day period when we know that markets slow during the holiday periods. 

Money has still flowed into the alternative space, but returns have disappointed on both an absolute and relative value basis. Many skill managers have stated that it has been a tough market for making money, but investor patience is something that is always in short supply when it comes to demanding   returns.The end of the year should see more hedge fund fall-out for small firms that have under-performed. Scale and rationalization will be occurring after these returns.