Though hedge fund performance was negative in January, falling an average of -0.6 percent, the industry broadly outperformed global equity markets.
An eVestment report described the beginning of 2014 as “a very difficult month”, driven by an increasing uncertainty in emerging markets.
But while fear in emerging markets was to blame for much of the global equity markets’ decline in January, not all was negative from emerging market hedge funds. Those targeting markets in Africa and the Middle East were able to post strong returns during the month, picking up where they left off after an excellent 2013.
Volatility strategies, which lagged the industry throughout most of 2013, were well positioned to take advantage of equity markets’ uptick of fear. The group’s January returns were their best in 17 months as the VIX volatility index spiked to its highest level in over a year.
Activist strategies were able to post positive performance amid equity market declines with an average return of 0.3 percent. “After leading most of the hedge fund industry in 2013 on the back of strong equity markets, it was interesting to see their good relative performance during what was a broadly negative month,” said the report.
Directional equity strategies declined in January, but posted their largest outperformance of the S&P in more than two years.
Credit strategies also posted negative returns in January, the second down month in the last six. Directional strategies underperformed relative value in a period where longer term treasury yields declined, an indication of widening spreads across the groups’ aggregated holdings and a decline in global risk appetite.
Mortgage-backed securities-focussed strategies were able to perform well in January, returning an average of 1.1 percent. The group has performed relatively well since their rare decline on the back of the rate spike in May 2013, said the report, adding that investor redemptions emerged for the group in the second half of 2013, but returns have shown resilience.
Macro and managed futures strategies were unable to follow a strong Q4 2013 with continued success, and many funds which posted the best returns in December were the loss leaders in January.
Both large and small macro strategies declined during the month, but large macro managers again outperformed their smaller peers in January, the continuation of a trend seen in much of 2013.
Large managed futures strategies did not enjoy the same advantage in January as aggregate losses between large and small funds were generally on par.
