According to Chicago-based hedge fund data, research and consulting firm HFRI, hedge fund performance surged 4.1% in February following a strong January as interest rates, commodity prices, and inflation expectations all rose.
February Performance for Hedge Funds
According to data released a few weeks ago, the HFRI Fund Weighted Composite Index®(FWC) gained +4.1% in February, while the investable HFRI 500 Fund Weighted Composite Index advanced +3.2%. While this monthly showing is strong, it reflects a wide dispersion of fund performance as the top decile of funds posted a gain of 16.3% while the bottom decile of funds posted a -3.1% decline.
Long/Short equity hedge strategies, led February fund performance as the HFRI Equity Hedge (Total) Index surged +4.8%, with strong contributions from a wide range of sub-strategies. A few of the equity hedge strategies that stood out during February include the HFRI EH: Energy/Basic Materials Index which surged +9.7%, the HFRI EH: Fundamental Value Index which advanced +6.4%, and the HFRI EH: Sector-Technology Index which rose +4.4%.
Event-Driven strategies, which often focus on out of favor, deep value equity strategies and situations, continued to post gains in February, with the investable HFRI 500 Event-Driven Index surging +2.8%, while the HFRI Event-Driven (Total) Index gained +3.6% during the month. The Event Driven strategies that posted the strongest gains during the month include the HFRI ED: Activist Index which surged +8.3% in February, the HFRI ED: Special Situations Index which rose+4.1%, and the HFRI ED: Credit Arbitrage Index which gained+2.7%.
Macro strategies also posted strong performance in February as the HFRI Macro (Total) Index jumped +3.6%, and the investable HFRI 500 Macro Index spiked +3.7%. Two of the macro sub-strategies which posted the best performance included the HFRI Macro: Systematic Diversified/CTA Index, which gained +4.4% in February, and the HFRI Macro: Commodity Index, which added+4.1% during the month.
Blockchain and Cryptocurrency hedge fund strategies continued to deliver strong performance as cryptocurrencies reached record highs and as hedge funds increasingly incorporated related exposures into new and existing fund strategies. The HFR Blockchain Composite Index and HFR Cryptocurrency Index each surged nearly +30.0% in February.
Recent hedge fund gains continued through February, marking the strongest 4-month period for hedge funds in over 20 years as the drivers of performance included Equity Hedge, Event Driven, Macro and Crypto related strategies. Clearly, new government stimulus measures and increased vaccinations have buoyed the equity markets, while increased inflation concerns have helped Crypto assets surge to historic highs.
According to HFR, total hedge fund capital jumped to $3.6 trillion at the beginning of 2021, an increase of $290 billion in 4Q20, representing the largest quarterly asset growth in industry history. This asset growth reflected net asset inflows of $3.0 billion in 4Q20, bringing total inflows for the second half of 2020 to an estimated $16.0 billion.
The positive environment for hedge funds in the last 4 months would lead us to take a more bullish view on the institutional research marketplace as hedge funds are traditionally the most aggressive users of sell-side and independent research, and the most lucrative clients for these providers. In addition, we suspect that robust equity commission volume that was evident over the course of 2020 is likely to boost near-term research payments from many hedge funds – particularly those in the US as unbundling has not taken hold here.
Unfortunately, most long only managers continue to refuse to increase payments to their sell-side and independent research providers due to the limited research budgets established in the wake of MiFID II. These conflicting trends suggest that most external research providers are likely to continue focusing their efforts on serving their hedge fund customers as they remain the most profitable clients.