How Hedge Funds Closed Out 2016, And Why Hopes For A 2017 Rebound May Disappoint
By Tyler Durden
2016 was a year most hedge funds would be happy to forget. And while the same goes for 2015, 2014, 2013, 2012, 2011, and 2010, in fact virtually every year since the financial crisis in which the vast majority of the two and twenty crowd have failed to generate alpha, in 2016 – a year many said would mark a renaissance for active managers – the “flash hedge fund return” according to a report by BofA’s Paul Ciana from Friday was a paltry 3.34%, which as BofA conveniently calculated meant they “underperforming the S&P500 index by 6.2%” at which point your average underperforming hedge fund manager complains that they shouldn’t be benchmarked against the S&P, even as the redemption notices flood in and the AUM gets ever smaller.
Not everyone did poorly: credit related strategies lead HF performance, including Distressed Credit, Convertible Arbitrage and Event Driven strategies. On the other end, predictably, dedicated Short Bias was down 5.10%
Looking at specific names, the following HSBC table breaks out the best and worst hedge funds as of the last week of December 2016:
In recent weeks there has been a fresh burst of hope that 2017 will be better for the HF community as a result of the recent collapse in cross-asset correlation; it is hoped that the resulting returns dispersion will make it easier for hedge funds to stand out in a world in which due to central bank intervention, correlations had been abnormally high following the financial crisis.
But is that an accurate description of events? To a great extent, the answer is no.
While correlation between diversified HF performance and S&P 500 price return declined from the May 2016 high (Chart 1), the 1-year correlation (83.7%) was slightly above the 3-year correlation (83.0%) as of the end of November. Overall, correlation remained far higher than it has been historically. Which as BofA redundantly explains, means that “when S&P 500 declines, performance of HFs with higher positive correlation is expected to suffer.“
Not all “hedge” funds have such a high correlation, however. The correlation relationship with S&P 500 varies substantially among different HF strategies. Short Bias and Merger Arbitrage offer negative correlation or most diversification effects. Equity focused HF strategies, including Equity Market Neutral and Long/Short, has decreased correlation to the S&P 500 compared to longer term relationship (3-year and 5-year). On the other hand, Distressed Credit, Convertible Arbitrage and Event Driven have increased positive correlation (Chart 2).
Yet, while there are some notable exceptions, the rule generally is that as the market goes, so goes the average hedge fund. Which is why some of the world’s wealthiest billionaires are pleading that Trump does not disappoint and manages to keep pushing the S&P to ever higher records on nothing but hope of a “fiscal stimulus” which may well never come.
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That said, how did hedge fund close out 2016? Here is the answer based on the latest …read more
Source: How Hedge Funds Closed Out 2016, And Why Hopes For A 2017 Rebound May Disappoint
