According to HFR, a Chicago-based hedge fund research firm, hedge funds in November posted their second strongest monthly gain on record driven by optimism around the availability and likely approval of multiple COVID-19 vaccines, and the results of the US election.
November HFRI Performance
According to HFR, the HFRI 500 Fund Weighted Composite Index surged 4.6% during November, bringing the YTD 2020 return to 5.6%. The 3 year and 5 year annualized performance for this index rose 4.1% and 4.5%, respectively.
The robust November HFRI gains were driven by Equity Hedge strategies, as global equities soared on positive market developments. The HFRI 500 Equity Hedge Index surged 7.5% in November, marking the strongest month on record for this index. Equity Hedge performance was driven by broad-based gains across diverse equity hedge strategies, with the HFRI 500 EH: Fundamental Growth Index soaring 9.9%; the HFRI EH: Fundamental Value Index surging 9.3%; the HFRI EH: Quantitative Directional Index jumping 8.5%; and, the HFRI EH: Multi-Strategy Index rising 6.1%.
Event-Driven strategies also surged in November as the HFRI 500 Event-Driven Index jumped 5.9%. This gain was propelled largely by activist investing as the HFRI 500 ED: Activist Index surged 11.0%. Merger arb and special situations strategies also performed well during the month with the HFRI 500 ED: Merger Arbitrage Index rose 6.7% while the HFRI 500 ED: Special Situations Index gained 4.6%.
Uncorrelated Macro strategies also posted strong gains for the month as equities and cryptocurrencies surged, with the HFRI 500 Macro Index gaining 1.1%. This rise was powered by gains in the HFRI Macro: Systematic Diversified Index and the HFRI 500 Macro: Multi-Strategy Index which both rose approximately 1.7% during November.
Hedge funds, as measured by the HFRI 500 Indices discussed above, clearly rebounded strongly in November following rather weak performance during the first ten months of the year. However, it’s hard to get terribly excited about hedge fund performance as they continue to lag the overall market by a pretty significant margin as the S&P 500 index surged 10.8% in November, enabling the overall index to rise 12.1% during the first eleven months of the year.
The poor performance of hedge funds relative to the overall market, plus the traditionally high costs of investing in these funds, continue to lead to fund closures. According to HFR, approximately 304 funds closed in the first three months of 2020, the most since the 4th Qtr of 2015. That represents an increase of more than 50% from the 198 liquidations in the 4th Qtr of 2019. At the same time, only 84 hedge funds opened in the 1st Qtr of 2020, the lowest quarterly estimate since the financial crisis, when startups totaled 56 in the 4th Qtr of 2008. Closures have exceeded launches for seven consecutive quarters, according to HFR.
Normally, these fundamentals would lead us to take a rather bearish view on the institutional research marketplace as hedge funds are traditionally the most aggressive users of sell-side and independent research, and they are the most lucrative clients for these providers. Despite this pattern, we suspect that robust equity commission volume for much 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 on this side of the pond. However, we suspect this is unlikely to be a long-term trend as the fundamentals of the hedge fund space remains weak.