Hedge funds posted strong gains in early 2017 as Donald Trump was inaugurated as US President, led by the performance of equity hedge strategies, the largest area of hedge fund industry investor capital, according to data from HFR.
The HFRI Fund Weighted Composite Index (FWC) gained 1.2 per cent for the month, the strongest beginning to a calendar year since the +2.5 per cent return to begin 2013.
It extends the record Index Value to 13,107 and tops the return of the Dow Jones Industrial Average (DJIA), as well as most European equity markets, over the same period.
Equity hedge (EH) strategies led industry performance to begin 2017, with the HFRI Equity Hedge (Total) Index up +2.1 per cent, led by strong contributions from growth, technology and healthcare sub-strategies. The January gain marks the strongest start to a calendar year for EH since gaining 3.3 per cent to begin 2013 and is in stark contrast to the sharp decline of 4.6 per cent in January 2016; the January 2017 return also tops the gain of both the DJIA and the S&P 500 indices. EH sub-strategy performance was led by the HFRI EH: Sector-Technology Index, which advanced 3.6 per cent in January.
Also strongly contributing to EH performance for the month was the HFRI EH: Fundamental Growth Index, which climbed 3.4 per cent, the strongest monthly gain since March 2016 and nearly matched the FY16 gain of 4.1 percent; the HFRI EH: Sector-Healthcare Index rose 2.8 per cent for the month.
Emerging markets also surged in January as the HFRI Emerging Markets (Total) Index advanced 3.3 per cent, led by the HFRI EM: Latin America Index, which gained 6.4 per cent.
As reported previously by HFR, capital invested in equity hedge, the industry’s largest strategy area by capital, increased by USD7.5 billion in 4Q and USD20 billion for FY16, rising to a record USD849 billion.
Fixed income based relative value arbitrage (RVA) strategies also advanced to begin 2017, with the HFRI Relative Value (Total) Index climbing 1.5 for the month. RVA sub-strategy performance was again led by yield alternative strategies, with the HFRI RV: Yield Alternatives Index rising 3.2 per cent, extending on the 17.9 per cent gain from 2016. Similarly, corporate fixed income strategies also advanced in January with the HFRI RV: Corporate Index advancing 1.5 per cent, extending the 11.6 per cent gain from 2016.
Event driven, the top performing strategy in 2016, extended gains in January, with the HFRI Event-Driven (Total) Index rising 1.1 per cent for the month, following last year’s return of 10.7 per cent. ED sub-strategy performance was led by distressed, the leading sub-strategy from 2016; the HFRI ED: Distressed/Restructuring Index advanced +2.0 per cent in January, building on the gain of 15.3 per cent from 2016. Exposures to credit arbitrage and special situations also produced strong performance for the month, with the HFRI ED: Credit Arbitrage Index and the HFRI ED: Special Situations Index both advancing 1.6 per cent. The HFRI Event-Driven (Asset Weighted) Index rose 1.5 per cent in January to begin 2017.
Partially offsetting these gains, macro strategies posted a decline in January, with the HFRI Macro (Total) Index falling 0.5 per cent for the month. Macro sub-strategies which detracted most from strategy performance were active trading and quantitative, trend-following CTA strategies, as the HFRI Macro: Active Trading Index declined 1.9 per cent, while the HFRI Macro: Systematic Diversified/CTA Index fell 1.2 per cent. The HFRI Macro: Discretionary Thematic Index gained 0.9 per cent in January, to partially offset the overall Macro strategy declines.
“Hedge funds produced gains to begin the new year, as global equity markets posted mixed performance and the US dollar declined with financial markets focused on new policies of the Trump administration regarding strategic impact on immigration, trade, manufacturing, national security, market regulation and infrastructure,” says Kenneth J Heinz (pictured), president of HFR. “January extended the fluid market dynamics which have defined the transitional, post-election period, and the hedge fund industry has been strategically positioned for these developments. Tactical, long-short exposure to these shifting trends across various asset classes, as well as both US and non-US exposures, are likely to drive performance through the first half of 2017.”