International political and economic uncertainty prompted hedge fund managers to reduce their exposure to risk by selling equities, inflicting losses throughout the industry in August.
Controversy over possible US involvement in the conflict in Syria and a potential tapering of the US Federal Reserve’s policy of quantitative easing helped spur a loss of 0.7 percent in the HFRI Fund Weighted Composite Index, a broad measure of global hedge fund industry performance, according to industry analysis and consulting firm Hedge Fund Research (HFR).
The loss follows a gain of 1.4 percent in July, when hedge funds briefly reassumed a risk-on stance, increasing investment in emerging markets and equities seen as carrying a greater risk.
Investments in emerging markets were among the worst hit, with the HFRI Emerging Markets Global Index declining 1.3 percent in the month. The index for Latin America also dropped 1.3 percent while the Russian index fell 0.9 percent.
Over the past 12 months, the Latin American index is down 7.3 percent while the Russian index has lost 2 percent. Asian emerging markets neither gained nor lost in the month, preserving their 12.9 percent gain from the past 12 months.
‘Volatility and uncertainty increased in August across both economic and political forums,’ says Kenneth Heinz, president of HFR, in a press release. ‘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.’
But Heinz also predicts a ‘strong performance’ in emerging markets in coming months after losses created buy opportunities in some assets and as economic and political uncertainties are resolved or clarified.
Among asset classes, investments in equities were among the worst hit, with the HFRI Equity Hedge (Total) Index falling 0.7 percent. HFRI’s Short Bias Index, which measures the strategy of shorting equities, posted the best performance of all hedge fund indexes, rising 0.6 percent.
