Hedge funds showed more dispersion in performance in November with managed futures and global macro generating good returns while the remaining hedge fund strategies generally losing money. Both equity and fixed income related strategies underperformed and multi-strategy managers had a poor month simple because they have a tilt toward equity trading. The market was punctuated by the surprise in the employment number at the beginning of the month with a spike in volatility. The flat performance in equity indices for the month as well as the falling trend in volatility masked the chop within the month that caused the trading loses. More diversified strategies like managed futures did better even though there were more shallow trends.
The year to date performance of hedge funds is now showing more dispersion across strategies with merger arbitrage, market neutral, and absolute return strategies doing best while special situations, distressed, event, and direction equities having a bad year. Merger arbitrage has seen significant deal flow which allows for more trading opportunities. Fixed income credit and relative value arbitrage have not been able to find opportunities in this low volatility environment and higher expected rates.
With one month of trading to go for 2015, it is unlikely there will be much change in the relative and absolute rankings between hedge fund styles or traditional indices. We expect the FOMC meeting will be the highlight of the month and after which there will be limited trading. In fact, while many believe a rate hike is a done deal, positions are likely to be pared before this big announcement.
At current returns for traditional equity and bond benchmarks, hedge funds have not delivered on their promise of either higher alpha or better absolute return. Even with growth in alternative investments, this performance is likely to lead to manager shake-outs and more relative adjustments in portfolios.
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