Hedge funds saw negative returns in September

Anthony Lawler_GAM

Anthony Lawler, portfolio manager at GAM

By Emily Lai

Q3 has been difficult. Global growth concerns increased in September, the Fed is not calming market fears by giving a dovish statement after deciding to hold the rate move, and large company scandals, including Volkswagen and Glencore, contributed to the uncertainty and negative returns in markets. Hedge fund performance was broadly negative in September, the HFRX Global Hedge Fund index was down 2.1% and dropped 3% year to date. All the four main strategy indices were negative in September, the HFRX Equity Hedge Index and the HFRX Relative Value Arbitrage Index fell 2%, HFRX Event Driven Index dropped 3% and the best performer, the HFRX Macro/CTA Index posed a negative return of 0.55%.

The correlated sell-off in risk assets proved challenging for active managers.  Anthony Lawler, portfolio manager at GAM says the main challenge was that the dispersion of single-security performance was low as the market traded down in unison.

“Traders came into September with reduced exposures, but even so, the correlated sell-off resulted in losses as markets did not reward fundamental relative value picking. Fears about a global recession grew, resulting in risk asset prices falling almost in lock-step around the world. That is a tough environment for investors to produce outperformance,” he says.

He notes that traders continue to believe that global recession is not going to happen even given the moderating global growth. He found that traders were still longing risk assets like equities and were actually trimming short exposures by month-end. As a result, funds have higher net exposure to equities at the end of the month. “Equity traders continue to select what they consider to be over-sold single equities that would benefit from a slow cyclical recovery,” he says.

On the other hand, trend following managers who are more conservative with their portfolios outperformed in September. In aggregate, they long bonds and short energy and even short some equities, all these helped them generate a positive month of performance.

“September highlighted again why it is worth considering this type of exposure within a portfolio, as it is a strategy that can perform in a risk-on environment, where most other strategies and exposures struggle,” he says.

Entering Q4, Lawler sees some good entry points if the world continues to muddle through current uncertainties. One bright spot is that traders across strategies have mainly maintained their constructive views, but with reduced sizing. BM

And here is the trend:

Equities

  • gross exposure is slightly down
  • Increased net exposure in Europe with supporting economic growth, consumer sentiment and employment trends in the region

Global macro

  • Reduced position due to market uncertainty
  • Remain long US dollar versus specific emerging markets and euro

Credit

  • Market liquidity evaporating but is opening up opportunities for patient capital to increase exposure at attractive levels as yields have spiked sharply
  • Default rates expected to remain very low except for energy and commodity credits