According to Chicago-based hedge fund research firm HFR, hedge funds extended their strong January gains into February, leading the HFRI Fund Weighted Composite Index to post a 4.9% gain over the first two months of the year — the strongest start to a calendar year seen in this index since 2012.
HFRI February and YTD Performance
The HFRI Fund Weighted Composite Index (FWC) rose +1.4% in February, with gains across all main strategies. The February gain for the HFRI FWC brings YTD performance to +4.9% — the strongest performance seen in this index over the first two months of the year since 2012.
Equity Hedge strategies led HFRI performance for the month, with the HFRI Equity Hedge (Total) Index gaining +1.8%, bringing YTD performance to +7.0%. Event-Driven and Relative Value Arbitrage strategies also advanced in February, with the HFRI Event-Driven (Total) Index gaining +1.5%, while the HFRI Relative Value (Total) Index advanced +1.0%. Macro strategies also gained for the month, with the HFRI Macro (Total) Index advancing +0.7% in February.
Kenneth J. Heinz, President of HFR commented on this performance, “Hedge funds extended early 2019 gains to the strongest start to a calendar year since 2012 as risk-on sentiment accelerated. In contrast to January, February gains were even more broad-based across strategies including not only equity beta-sensitive areas, but with strong contributions from credit, commodity, quantitative, emerging markets and volatile cryptocurrency exposures. As the end of the first quarter approaches, investor risk-on sentiment has moderated marginally, with uncertainty regarding trade negotiations and geopolitical tensions reemerging as potential sources of volatility. It is likely that flexible strategies which are able to adjust to capturing beta-driven gains while also providing defensive portfolio protection will lead industry performance in 1H19.”
Our Take
On the heels of a terrible 4th Quarter, hedge funds have rebounded nicely during the first two months of 2019. However, compared to the overall equity markets, hedge funds continue to underperform as the 7.0% gain seen in the HFRI Equity Hedge (Total) over the first two months of the year lags the MSCI World Index’s 10.7% surge over the same time period.
Consequently, we suspect that investors are likely to continue withdrawing assets from hedge funds – though performance-based gains could raise overall assets under management in hedge funds.
Despite this trend, hedge funds are likely to continue to boast a robust appetite for insightful sell-side and independent research, and an increasing interest in alternative data. In fact, given the way many long only asset managers have sharply reduced their research budgets in response to MiFID II, we would not be surprised to see many research firms focus even more of their attention marketing to and serving their hedge fund clients.