It’s been a tough year so far in the markets.
There has been the lingering impact of the Covid pandemic, with local lockdowns in important manufacturing and transhipment centres like Shanghai leaving global supply chains in a tangled mess.
Then there have been the side effects of the economic medicine for Covid, with the huge global stimulus overseen by governments and central banks leading first to inflationary pressures then to rising interest rates, and now the spectre of stagflation.
And then the Russian invasion of Ukraine. While not ignoring the very real human cost, that has also added a serious further geopolitical twist to stressed commodity markets from oil and gas to agriculture and food.
Not surprisingly, after years of relatively plain sailing during the era of quantitative easing (QE), equity markets have suddenly been hit – with the MSCI World index plunging -20.5% in the first half of 2022.
As in the past, such markets present both a challenge and an opportunity to hedge funds – if they can demonstrate their value in difficult markets.
So how have hedge funds been doing in this new bear market? Well, so far, not too bad.
June was certainly a tough month overall, judging by the Eurekahedge Hedge Fund Index – with a loss of about -2.7%, taking the year-to-date loss to around -5.6%.
Nevertheless, that looks a lot better than global equities – and in particular, the growth-oriented tech stocks of the US such as Tesla, Meta (Facebook), Zoom and Netflix, which have dominated markets in recent years – but all now fallen dramatically from their highs of 2021.
But there are, as always, some nuances to the numbers. According to the latest detailed monthly report on industry performance from Aurum Fund Management in London, equity long/short funds underperformed a little in the past year – with an average asset-weighted return of -10.8%. That is better than the MSCI World loss of -14.34% over the year to end-June – though Aurum judges those funds against the S&P Global BMI index, which was down a more modest -9.5% over the same 12 months.
According to Aurum’s analysis, subsets of the equity long/short universe that struggled most were sector funds – many of which focusing on growth areas like tech stocks – and US-focused funds, which would also tend to have a high exposure to growth and tech.
Against that, the major subsets that have been performing better have included European long/short funds, according to Aurum, as European markets tend to feature more ‘old economy’ stocks – and so offer more of a bias to value than to growth. European long/short funds were only down an average of -5.3% in the past 12 months – a reasonably respectable number.
But outside of long/short equity the global industry has clearly been doing reasonably well, with a lot of macro and quant-driven funds like CTAs notching up chunky gains – much like they did in 2008.
The dispersion of returns across the universe of funds is no doubt higher in a more volatile market. But overall, hedge funds seem to be doing well so far in proving their worth.
And what can we say so far about the tiny subset of the hedge fund universe in South Africa? Well, so far so good there too – arguably, even better than global peers.
Partly, this reflects a relatively more benign local market – with the JSE All Share index barely down over the past 12 months, making it one of the best performing equity markets in the world over that period.
Indeed, after hearing years of pessimism about the local market – given a long list of issues from unemployment and inequality to crime and corruption, particularly during the Zuma years – I was pleasantly surprised at the HedgeNews Africa Symposium in March to hear some local players recognise that South Africa is perhaps not such a bad place to invest currently.
Against that backdrop, the small but high-quality community of local hedge fund players have also continued to prove their worth. The HNA South African Single-Manager Composite was still in positive territory with a gain of +1.53% for the first six months of the year through June – against a JSE index that had fallen -8.3% over the same period. The SA Long/Short Equity index subset was up +0.36% over the same period.
That said, the outlook for markets does continue to look treacherous, and there will no doubt be further big challenges ahead. But it has been a good start for hedge funds in what looks like a challenging new era of volatility and potential stagflation. Copyright. HedgeNews Africa – July 2022.
