Hedge Funds Lose Ground As US Equity Markets Log Largest Decline This Year - HFR

Natasha Taghavi

11 September 2013

Hedge funds declined in August, while US equity markets posted the largest decline of 2013 as investors reduced risk in reaction to weakness in emerging market equities and currencies, expectations for the end of tapering by the US Federal Reserve, and uncertainty regarding US and international involvement in Syria, according to Hedge Fund Research.

The HFRI Fund Weighted Composite declined by -0.70 per cent for the month with mixed performance across various equity hedge, event driven and relative value arbitrage strategies offsetting weakness in macro strategies, the firm said.

The HFRI Event-Driven Index posted a narrow decline of -0.04 per cent for the month, paring the 2013 gain for ED to +6.9 per cent, as the market for corporate transactions remained robust despite the equity market declines. Credit arbitrage hedge funds gained +0.8 per cent and distressed funds advanced +0.08 per cent in August, while merger arbitrage and special situations saw narrow declines of -0.11 and -0.24 per cent, respectively.

“Volatility and uncertainty increased in August across both economic and political forums, contributing to mixed sub-strategy performance, wide dispersion and macro-centric weakness across hedge fund strategy performance,” said Kenneth Heinz, president of HFR.

“While the geopolitical environment has remained fluid and unpredictable through month end, many funds entered August with conservative positioning in regard to expectations for US Federal Reserve stimulus extraction, reducing exposure to rising bond yields through effective portfolio hedging, composition and duration management. Recent emerging markets weakness has created opportunities in EM equity and currency markets for hedge funds to provide liquidity and position for growth across various EM regions. Both of these trends are likely to contribute to strong performance in coming months as the joint economic and political uncertainties continue to evolve,” Heinz added.

Meanwhile, the HFRI Relative Value Arbitrage Index fell -0.46 per cent for the month, with equity and fixed income hedges reducing volatility across RVA sub-strategies. The HFRI RV: Fixed Income – Asset Backed and Convertible Arbitrage Indices posted gains of +0.15 and +0.22 per cent, respectively, for the month, while volatility funds fell -0.20 per cent.

The HFRI Equity Hedge Index declined -0.7 per cent in August, as gains across HFRI energy/basic materials , technology/healthcare and short bias were offset by declines in fundamental value and growth, which dropped -1.3 per cent and -0.6 per cent, respectively, HFR added.