Red ink spoiled an otherwise positive 2019 for he Eurekahedge Hedge Fund Index. The decline of 0.71% leaves the year-to-date performance still well up, at +4.32%. Approximately 41.6% of the funds Eurekahedge tracks were in the black for the month. And 15% have generated double-digit gains year-to-date.
North America-mandated hedge funds slid down 1.22% in May. Eurekahedge attributes this to the fall-off in the region’s equity markets because of the collapse of US/China trade talks. The S&P 500, for example, began May at 2932.47 and ended it at 2744.54.
All the geographical mandates were down in May. North America’s performance was the worst, followed by Europe’s. The least bad results came from Japan.
Commodities and Macro
Also, May was a month of sharp declines in oil prices, largely due to the rise of US shale oil and gas. As a JPMorgan energy analyst said in the second half of the month, “It is hard to make a case why oil prices materially move up from here.” Given that sort of bearishness, it is unsurprising that, as Eurekahedge says, “fund managers with long exposure to the energy sector suffered losses.”
Exposure to precious metals on the long side turned out to be a good thing in May. Gold served its customary role as a haven for investors spooked by volatility elsewhere.
Despite the run-up in precious metals, managed futures as a strategy was down 2.2% for the month. The worst-performing strategy was long/short equity, at -10.6%, followed by multi-strategy. The least poor performance was relative value arb, which was actually in the black at 0.6%.
Macro strategies, which had negative performance in May, stayed very close to even in total assets under management because of their positive flow.
Asset-Weighted and Volatility
The asset-weighted Mizuho-Eurekahedge Index-USD tells the same story as above, although of course the specific numbers differ. Mizuho declined 1.33% in May. Most of its geographical sub-indexes were down in May, with the Asia-Pacific index faring the worst.
The CBOE Eurekahedge Volatility Indexes consist of four equally weighted vol indexes—long vol, short vol, relative value and tail risk. They are designed to track the results of the respective vol-based strategies.
Long vol, which had performed poorly in volatility-muted April (down 2.32%) made a comeback in May (up 2.07%). Short vol, then, which had done well in April (up 1.23%) fell off in May (still positive but very nearly flat).
Hedge fund managers using tail risk vol strategies took a big hit in May. On a year-to-date basis, tail risk volatility and long volatility hedge fund managers are in the red ink by 8.95% and 5.54%, respectively.
A word about insurance-linked securities (ILS). The Eurekahedge ILS Advisers Index slumped 0.84% in May, which brought its 2019 year-to-date loss to 1.10%. Investor interest in this strategy remains robust, though. Through the nearly two and a half years since the start of 2017, the estimated total allocations into this hedge fund space come to $18.9 billion.
Funds of Hedge Funds
This month’s report includes a discussion of recent trends in the fund of hedge funds space. Funds of Hedge Funds assets under management peaked in 2007. The number of such funds peaked the following year. During the years since the global financial crisis, there has been a steady though for the most part a slow decline in the size of this category by either metric.
In 2018 there were 44 launches of such entities but 179 closures, making 2018 “the eighth consecutive year of population decline,” according to Eurekahedge. Demand for funds of hedge funds remains anemic. Investors by and large want direct exposure to single-manager funds, and only one layer of fees. Another point weighing down demand is illiquidity/redemption periods, although managers have been bringing the average redemption period down in recent years.
In 2019 year-to-date the pattern of depopulation is the same as it has been: only five launches thus far, but 40 closures.