Q: Can you discuss hedge fund performance during the 2018 market backdrop and the 2019 rally?
In 2018, the MSCI World was down about 8.7%. That was an environment when hedge funds, measured by the HFRI Fund Weighted Index, were only down 4.8%, which provided a nice cushion compared to global equities.
In comparison, hedge funds were up 8.4% through November 2019 while global equities were up 24.0%. However, it is crucial for us to also take a deeper dive into the more volatile times this year, which were May and August in particular.
In May 2019, global equity markets dropped 5.8%. Hedge funds on the other hand were down less than 2%, which provided a nice cushion. A similar situation occurred in August 2019, when global equities lost 2.1% while hedge funds were down 78 basis points. The Macro category generated positive, diversifying returns over both months, partially offsetting losses.
Those challenging periods demonstrate that alternatives have actually been able to provide some protection over just investing in equities during volatile times.
Q: Can you talk about your recent observations on hedge fund performance across different categories?
In the YTD as of November 2019, all four categories of hedge fund investing realised positive returns.
The Equity Long/Short category was the best performer, gaining more than 11%, driven most notably by growth strategies. Relative Value was up more than 7%, with steady, low volatility performance throughout the year. Event Driven gained roughly 6%, on the back of robust corporate actions, with little volatility and a stable credit market. Similarly, Macro gained roughly 6%, benefitting from long positions in government bonds in the first half of the year, followed by long exposures to global equities in the fourth quarter, though some of the gains in fixed income were given back as rates generally rose during the equity rally.
Q: Can you share some of the research that you’ve done on individual manager persistence?
We conducted a long-term persistence study spanning data from 2003 to 2016, and looked at the top 20% of hedge fund performers in any given year and measured where they were likely to rank in the following year. Less than a third of these top quintile performers in one year are likely to repeat a position in the top 20% just one year later. Additionally, almost a fifth of the top performers in one year are likely to end up in the bottom quintile in the next year instead.
If we focus on the more volatile environment of 2018 and 2019 YTD, the numbers are even more pronounced. Only 10% of fund managers were able to repeat in the top 20% for 2019 YTD, with a fifth of the funds ending up in the bottom 20% instead.
Overall, as these examples suggest, our findings indicate little evidence of performance persistence over time.
Q: Can you share how you think about investing in your alternatives program?
We take a diversified and varied approach to deliver hedge fund-like returns without directly investing in hedge funds.
We do not invest in any hedge funds or external managers directly, instead we employ a wide range of liquid instruments, spanning for example single name equities, ETFs, futures, FX forwards, and others.
We are looking to provide exposure to all the four main hedge fund styles: Equity Long Short, Macro, Relative Value and Event Driven.
We invest in a diversified bundle of liquid hedge fund market exposures and trading strategies by using our knowledge of the hedge fund industry and our data sources and technology. Our hedge fund knowledge comprises many individuals that have worked at hedge funds, have closely interacted with hedge funds or have been engaged in trading activities. This expertise and knowledge put us in a position to really get to the bottom of the systematic drivers of hedge fund returns. We then complement these fundamental insights with a range of data sources, including hedge fund return databases, prime brokerage reports, hedge fund consultants or public hedge fund filings such as 13-F.
