2016 is a year is turning out to be special for relative value hedge funds focused on distressed and event driven strategies. These two along with special situations, equity market direction, and convertible arbitrage moved to be the August winner. The losers for the month were fundamental growth and systematic CTA’s. Both these strategies need movement in economic or firm-specific fundamentals which just did not occur for the month. Relative to the flat equity and fixed income markets, August performance for hedge funds was at best fair.
The year to date hedge fund performance is consistent with what occurred in August. Relative value strategies performed best while equity hedge fund strategies lagged. In general, alpha selection within the equity asset class has not been a big winner relative to just buying indices. The same can be said for fixed income. With a third of the year to go, hedge funds have a lot of ground to make up relative to benchmark indices.
After hundreds of discussions with hedge fund managers, I am still surprised that there is a fear of revealing investment processes under the assumption that someone will steal their ideas and intellectual capital. There are few investment styles that are truly unique and special. What is special is still strategy execution – the practical process of delivering returns. Skill is with the decision-making execution of information and strategy.
All hedge funds are not created equal as the return box chart shows for the post Financial Crisis period. There is a significant amount of dispersion across hedge fund styles. Over the period 2009-2018, the difference between the best and worst hedge fund category is almost 7 percent after we account for global equities and bonds.
The attraction to private equity and other less liquid alternatives is clear from the Guide to Alternatives by JP Morgan Asset Management. The return profile is much higher for private equity and debt funds than more liquid alternatives and global bonds; however, the dispersion in returns is multiples higher than what can be expected from other public categories.
