Editor’s Letter – Issue 138

January 2019

Hamlin Lovell

Average hedge fund performance for 2018 ranged from -3.19% for the Credit Suisse Hedge Fund Index, through -3.81% for the Mizuho-Eurekahedge Index, to -4.01% for the HFRI Fund Weighted Composite Index, and -5.01% for the Barclay Hedge Fund Index. As most of these are USD-denominated, returns for GBP, EUR, or CHF-denominated share classes, or returns hedged back to European currencies, will have been lower by 2% or more.

2018 saw one of the most synchronised downturns ever, with nearly all liquid asset classes including most global equity markets and credit markets losing money. Unstable factor returns and violent reversals also made life more difficult for many market neutral and quantitative strategies. 

But there were some brighter spots. Within quantitative trading, Renaissance Technologies produced positive performance for two of its strategies. Some, but not all, CTAs trading non-traditional markets also profited last year. Short term trading strategies, which have on average been struggling for many years, saw a mini-resurgence in performance, with the SG Short Term Traders Index up 3.28% last year.

In global macro, and systematic macro, managers including Crescat, Brevan Howard, Element, Graham Capital, Tudor, and Autonomy, posted strong numbers, in some cases their best since 2008. In systematic macro, Bridgewater and Aspect Systematic Global Macro, which we have profiled, also stood out. In commodities, Northlander and Merchant were well positioned for the energy market swoon. The HFRI Currency Index had an unremarkable year, ending up 0.44%. 

In relative value trading, the HFRI Relative Value Index finished the year up 0.66%, with Fixed Income-Asset Backed strategies up 3.07%. The Credit Suisse Fixed Income Arbitrage Index also advanced 1.1%. 

In event driven, activists, including Third Point and Greenlight, generally saw a setback but merger arbitrage profited as spreads widened while deal breaks remained low. The HFRI Event Driven Merger Arbitrage Index ended up 3.25% and John Melsom’s Omni Event Strategy, which we profiled, finished the year up double digits.

In multi-strategy, giants Millennium Partners, Citadel and D. E. Shaw all delivered returns comparable to their histories.

On a five or ten-year lookback, plenty of hedge fund strategies are matching their targets for both absolute and risk-adjusted returns, and some of them will be recognised at our UCITS Hedge awards on 7 March 2019.

Alternative credit managers who pursue strategies such as direct lending, maintained positive returns consistent with their recent history. Fourth quarter data is not yet available for the Cliffwater Direct Lending Index, but for the first three quarters of the year, returns were very typical of prior years. We intend to showcase some of the strongest funds in the space at a dedicated event later this year. 

Going forward, wider spreads on corporate, emerging market, and asset-backed debt are improving the outlook for many credit-related managers. Valuation and performance dispersion is also welcomed by equity stock-pickers. Event driven managers remain upbeat on the climate for merger arbitrage and other event related trades. Many systematic and quantitative managers perceive 2018 to have been a highly anomalous year for market behaviour and expect to profit from some measure of normalisation.

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