As we reported yesterday, after the worst start in years, average HF performance finally turned positive for 2016 in July, however it continues to underperform the market by a substantial margin.
Systematic Macro/CTA funds led HF strategies in 1H16 with gains of about 5%, while Quant Equity, Discretionary Macro, Equity L/S, and Multi-Strat were all down in 1H16. Since the declines in Feb, Equity L/S and Event Driven performance has generally bounced back. In the past 6 weeks, hedge funds staged an impressive rebound, as a result of another sharp short squeeze and a surge in hedge fund leverage.
Even so, 2016 has been according to one buysider, “the most difficult, treacherous year” for the hedge fund community in recent history as a result of unprecedented shifts in market sentiment, choppy trading, low conviction, investor redemptions, illiquidity and volatility month after month, which has left the hedge fund community exhausted and reeling even as the S&P hits all time highs.
The following chart, courtesy of Morgan Stanley’s Prime Brokerage Services shows what the wall of worry, or perhaps excuses, has looked like so far and why the “smart money” have looked like anything but.
And yes, 2016 has so far been the most difficult year for hedge funds as least from the standpoint of global returns, which through July, have been the lowest YTD as of that moment for the entire decade.
Finally, in confirmation of what we said yesterday, namely that recent HF outperformance has been mostly a function of leverage and a short squeeze, Morgan Stanley adds that “2016 YTD stock picking alpha has been challenging on both sides of the book. Longs have appreciated less than the MSCI AC World and at the same time, shorts have increased more. At the end of July, longs were up 4%, shorts were up 6.9% (which hurt returns) and the MSCI AC World was up 6%.”
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