Although US equities rallied in the second half of the month to almost get to flat returns for February, hedge funds in most cases were not able to generate positive gains. The exception was managed futures which generated strong monthly gains and easily beat other hedge fund alternatives. The only two other positive gainers for the month were global macro and special situations which is a catch-all category.
Hedge funds should not be expected to track short-term changes in equities or bonds. Their beta exposure is significantly less and in the range of .3 to .6 versus the S&P 500; nevertheless, during periods of poor performance hedge funds should be muting the loses. To a degree they have been doing that so far this year. The combination of January and February for the HFR Global Index and Equal Weighted Indices have outperformed an equity portfolio, but many individual strategies have simply missed the mark.
The managed futures and global macro indices were the only two that have generated back to back positive returns for the first two months of the year. Managed futures has proved to be the most unique strategy, something we have continually discussed. As a divergent strategy, managed futures will do well when there are strong market dislocation. In contrast, most hedge funds have convergent strategies which do well when markets are more range-bound are moving back to equilibrium after a dislocation.
The first two months of 2016 can clearly be characterized by major market dislocations. A good environment for managed futures. Can we say that this will continue going forward? It may be difficult to predict which style will do well in the short-run. This is one of the key reasons why holding a diversified portfolio of hedge fund styles makes sense. Nonetheless, there should be clear overweight to the styles that are most unique.
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