Published on October 15, 2020

The best performing hedge fund strategies that have benefited from market volatility in 2020

The market has been on a roller coaster ride in 2020. The S&P 500 began the year extending its longest-ever bull market, which began after the 2008 financial crisis, and hit an all-time high in February. In March, the index fell more than 20% from that high into a bear market as the coronavirus pandemic sent investors into a tailspin.

After its March low, the S&P 500 rallied about 60% to notch another all-time high in early September. But following the record, the index has slumped, keeping investors on their toes.

The CBOE Volatility Index - the VIX, which is commonly referred to as the stock market's fear gauge - is trading at fairly elevated levels and suggests more volatility for months to come, regardless of the outcome of the November election.

The CBOE Volatility Index (VIX) has declined significantly since early 2020...

Hedge Fund Strategies Reversion Graph

...but remains solidly above its long-term average. Realized vol has backed it up.

Hedge Fund Strategies Elevation Graph

Sources: CNBC, Sep 24 2020. How to navigate volatile markets during retirement; Business Insider, Sep 23 2020. Don't fear the VIX. Volatility is here to stay for now, and that's no bad thing; Barron’s, Sep 24 2020. Stock Market Turbulence Is Here to Stay. How Protect Your Investments.

Institutions are showing more interest in hedge funds today than in the past 10 years

Hedge fund managers that have successfully navigated their way through the first half of this year and are producing good returns are in demand by institutional investors that are adding more hedge fund exposure to their portfolios and/or are upgrading lackluster managers with better choices.

"There's a sense of optimism from hedge fund managers, backed up by investors," said Thomas P. Kehoe, managing director and global head of research and communications for the London-based Alternative Investment Management Association.

"More investors are interested in hedge funds and are seeing a real tool they can latch on to in this difficult environment for preserving capital, managing volatility, mitigating risk and producing returns," Mr. Kehoe said.

In fact, high volatility in the first quarter this year was the catalyst for investors to consider more investment in hedge funds, said Kenneth J. Heinz, president of index provider Hedge Fund Research Inc., Chicago.

From conversations with asset owners, Mr. Heinz said, "I don't think there has been this much institutional interest in hedge funds over the past 10 years."

Source: Pensions & Investments, Sep 21 2020. Hedge funds wanted after investors lose complacency.

Hedge Fund Strategies Currently in Demand

Based on a recent survey completed by 300 sophisticated investors about what type of hedge fund strategies and managers they are interested in meeting, here are key observations:

  • Investors were first asked to list their current hedge fund strategies of interest. Long/short equity captured 65% of respondents, the largest share among all hedge fund strategies. This indicates a positive change in investor sentiment regarding a fund manager's ability to generate alpha in stock selection. Long/short equity has been losing market share for several years in the hedge fund industry and this data suggests a potential reversal of that trend.
  • Multi-strategy and event driven showed the second highest level of interest at (57%). This was followed closely by equity market neutral (54%), global macro (53%), special situations/specialty financing (52%), distressed (51%) hedge fund strategies.

Source: Opalesque, Sep 9, 2020. Hedge fund's mid-year trends and strategies currently in demand.

Market Volatility Prompts Investors to Seek Our Long/Short Equity Hedge Fund Strategy

Stretched valuations and the resulting pullback in equities have prompted more interest in long/ short equity hedge fund strategies that can provide some protection against market declines and wild swings, hedge fund and asset managers say.

Long/ short equity hedge funds, which bet on stock prices rising and falling, lost an average of 5.75% in March when markets plunged. But they went on to gain an average of 13.67% in the first eight months of 2020 and were the best-performing strategy in August, according to data from investment bank Nomura.

“We see great demand for strategies that protect from great volatility,” Philippe Ferreira at fund of hedge fund Lyxor Asset Management told Reuters.

Part of the protection long-short funds offer is by “shorting” -- borrowing a stock or security from an institutional investor, then selling it back when the price falls, pocketing the difference.

Fund research firm Preqin said that hedge fund equity strategies, which includes long/ short equity strategies, accounted for $929 billion of assets under management at the end of June, of $3.6 trillion in total global hedge fund assets.

Source: Reuters, Sep 25 2020. Market volatility prompts investors to seek out long-short equity.

View Long Short Equity Hedge Funds >>

‘Multi-Strategy’ Hedge Funds Show Way Forward For Industry

Net returns up to end-August (%).

Multi-Strategy Hedge Funds Graph

Source: HFR
© FT

Look at the best performing hedge fund strategies this year for a clue as to where the industry is heading.

Diverse, “multi-strategy” vehicles run by the likes of Citadel, Millennium, Balyasny and Point72, which marshal an army of fund managers, traders, analysts and risk managers, have been the big winners. They have returned more than 10% on average in the year to end-August, according to industry data firm HFR.

Dmitry Balyasny’s Atlas Enhanced Fund is the leader, notching up a gain of almost 23% up to the end of August, according to an investor document seen by the Financial Times. Sculptor Capital Management — formerly Och-Ziff — has also managed to dust itself off after a period of disappointing returns, the retirement of its founder Daniel Och and a scrape with the Department of Justice. It clocked a 12.5% return in its flagship fund.

Source: Financial Times, Sep 30 2020. ‘Multi-strategy’ hedge funds show way forward for industry

View Multi-Strategy Hedge Funds >>

Billions Flow Into Hedge Funds In August, Nearly 60% Of Funds See New Money

After a four-month string of asset outflows from hedge funds in March through June, hedge funds continued in asset-recovery mode in August, with investors adding $7.36 billion to the industry last month, according to the just-released August 2020 eVestment Hedge Fund Asset Flows Report.

"The proportion of funds with inflows was nearly 60%, which would make August 2020 the second most broadly positive month for hedge fund asset flows in the past five years," said eVestment Global of Research Peter Laurelli, the report's author.

Multi-strategy hedge fund manager Hudson Bay Capital Management LP, New York, attracted the largest amount of new investment capital — $745 million from five pension funds — among hedge fund managers over the 14-month period.

The $58.2 billion Los Angeles County Employees Retirement System, Pasadena, Calif., invested $300 million in Hudson Bay Fund, a relative-value multi-strategy fund, in May. Florida State Board of Administration, Tallahassee, which manages the $166 billion Florida Retirement System, invested $200 million in the same fund in April.

Hudson Bay's AUM rose 69.6% to $5.9 billion as of June 30, moving the firm to 55th from 77th in the survey.

  • BlueBay’s credit long/ short fund almost doubled, to $219 million in July from $126 million in October 2019, with the increase due to investor inflows as well as performance, confirmed a spokesman.
  • The U.S.-based long-short credit fund Aristeia International rose to $1.3 billion in July from $1.242 billion in December, according to data compiled by HSBC and seen by Reuters.
  • In long/ short equity, Lee Ainslie’s Maverick Fund rose to $1.5 billion in July, from $1.4 billion in November 2019, showed the data.

Source: Pensions & Investments, Sep 21 2020. Hedge funds wanted after investors lose complacency; Reuters, Sep 25 2020. Market volatility prompts investors to seek out long-short equity; Opalesque, Sep 24 2020. Billions flow into hedge funds in August, nearly 60% of funds see new money.


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