Tuesday, January 31, 2023

Three Ms dominate performance in year of hedge fund dispersion



Performance by the three Ms — multi-strategy, macro and managed futures/CTA managers — outshone the rest of the industry in 2022.

Each approach thrived in the immense macro volatility that roiled markets like a rip tide last year.

Major macro themes of inflation, war and central bank policy dominated — and stocks and bonds slumped as the post-2008 easy money era came to a definitive halt.

Performance drivers for these three strategies have been covered elsewhere on AFI. But one important aspect of last year’s returns landscape is the extent of the dispersion between the winners and losers.

According to HFR, the top decile of its main, 500-strong hedge fund database averaged a 39.1% gain. That is no surprise given the extraordinary numbers we have seen by some of the top performers in macro, managed futures and multi-strategy.

By contrast, the bottom decile declined by an average of 33%, producing a top/bottom dispersion of 72.1 percentage points, one of the highest on record.

That matters. It means the overall theme of hedge funds posting modest losses last year — the HFRI Fund Weighted Composite Index was down 4.3% — beating plunging stock and bond market returns, only tells part of the story.

It makes things more difficult for long/short equity in particular. Those funds have attracted broad criticism for losing ground last year (HFR’s index is down 10.4%, but estimates vary) despite the fact stock markets were down by twice as much.

The argument of capital protection is fine to make but gets harder when potential allocators can reply with mentions of the huge gains posted in other parts of the industry.

That scenario is made less likely by the fact allocators will usually be working on specific strategy mandates, rather than a general hedge fund mandate. The problem for strategies like long/short equity is that they will be less likely to get those mandates in the first place.

That assertion relies, perhaps unfairly, on the assumption that investors tend to be backward-looking. Some are positive on the strategy looking forward.

“We believe that in the long-run, fundamentals drive share prices,” said UBP in a market note. “Consequently, we expect in the medium to longer term strong returns from equity long short strategies.”

But overall the capital raising game continues to get more difficult. AFI has some research coming soon on the prospects in 2023, when business development staff hope to capitalise on investor portfolio shifts sparked by the market regime change.

But it will be hard. Agecroft Partners believes hedge fund managers only receive responses to 15% of requests sent to potential investors, unless they already know them.

“Hedge fund allocators are overwhelmed with the volume of incoming emails, calls and invitations to webinars and conferences. This makes it increasingly difficult to get a meeting with an investor, let alone a response,” said founder Don Steinbrugge.

Last year’s dispersion in hedge fund returns complicates the outlook further.