Risk aversion affected an otherwise resilient hedge fund market in the lead-up to the US elections, the approach of the so-called US fiscal cliff and the continuing European sovereign debt crisis, according to hedge fund indexation and analysis firm Hedge Fund Research (HFR). The concerns prompted the first monthly losses in hedge funds for five months in October.
The HFRI Fund Weighted Composite Index, a broad measure of global hedge fund performance, fell 0.5 percent in October, after gains of 1.1 percent in September gave the index a total increase of 2.9 percent in the third quarter of the year, HFR says, based on a preliminary analysis.
The HFRI Macro Index fell 2.2 percent last month as funds lost out on strategies based on commodities, currencies, fixed income and equities, according to HFR. The HFRI Macro Systematic Diversified Index dropped 3.5 percent, led by fixed income and US dollar exposure.
Uncertainty in the election contest between incumbent Barack Obama and contender Mitt Romney left many hedge funds unsure of how to allocate investments. The climate of caution was intensified by steady concern over the ongoing eurozone banking and sovereign debt crisis and the US fiscal cliff negotiations that must take place between Republicans and Democrats before the end of the year to avert the cancellation of tax cuts and spending increases that, analysts say, could provoke another recession.
‘Hedge fund performance in October reflects a definitive shift in investor sentiment from the beta-driven optimism over steady improvements in stagnant global economies to the realities, risk and uncertainly inherent in additional European banking stabilization measures, US elections and the pending fiscal cliff,’ says Kenneth Heinz, president of HFR.
‘Fundamentally based arbitrage, event and equity strategies demonstrated effective hedging against and tactical adjustment to these dynamic changes, while trend-following quantitative macro strategies experienced weakness as a result of them. Under the expectations of elevated financial volatility through year-end, hedge funds that have effectively demonstrated their ability to navigate this environment will continue to attract institutional investors.’
The HFRI Emerging Markets Index maintained a positive performance in the month, rising 0.3 percent, although performance differed widely between regions. The HFRI Latin America Index increased 0.6 percent while the index for Russia and Eastern Europe declined 1.1 percent. The Asia ex-Japan index increased 0.6 percent.
The best-performing hedge fund index of the month was the HFRI RV: Fixed Income – Asset Backed Index, which gained 1.3 percent. That index measures investment strategies focused on ‘realization of a spread between related instruments in which one or multiple components of the spread is a fixed-income instrument-backed physical collateral,’ HFR says.
