Most Hedge Funds Missed The Trump Rally: JPMorgan Explains Why

While the overall market reaction to the Trump victory has been swift and powerful, with the both the Dow Jones and S&P hitting almost daily record highs, as stocks - especially banks, financials, "value" and those without duration exposure - have soared, the benefits from these surges have not been captured by all market participants. In fact, according to the latest JPM analysis, most hedge funds investors have been unable to capture the upside from the recent market spike, while not a single investor class has been able to outperform the S&P500's 3.8% gain in the period from November 7 to December 7.

Here are some more observations from JPMorgan, which two weeks ago argued in its weekly "Flows & Liquidity" publication, that "investors appeared in general too reluctant or too slow to embrace the Trump trade post the US election."

That conclusion was based on the performance of various investor types since the election, at least the ones that report their performance on a daily basis. These performances had shown that only a few types of investors had managed to benefit from the big market moves since Trump was elected. This is shown in Figure 4 which updates the performance of daily reporting hedge funds and mutual funds since Nov 7th. The message is similar to that of two weeks ago: with perhaps the exception of currency hedge funds, investors did not have enough beta to the Trump trade.

As a quick aside, JPM notes one caveat of performance analysis based on daily data, which is that the daily HFRX indices might not be representative of HF performance given their small coverage relative to the more comprehensive monthly HFRI indices. With this week’s release of monthly HFRI indices for November, we are in better position to assess whether the picture in the chart above is a good reflection of what happened since the US election.

What we find is that based on monthly HFRI indices for the month of November, hedge funds have performed rather poorly returning only 0.9% overall in November according to JPM.

Event Driven outperformed returned 2.2% in November followed by Equity Long/Short, which returned 1.5%. But even this performance looks low compared to the 3.4% return of the S&P500 index during the month. Macro funds disappointed with a November return of -0.2%. This loss was led by Discretionary funds which returned -1.7% and CTAs which returned -0.5%. But given that the CTA category in HFRI indices includes Risk Parity funds which on our daily indices returned -1.7% we estimate that CTAs ex Risk Parity Funds did better returning perhaps close to 1.3%.

Similar to Macro, Relative Value also disappointed returning only 0.4%. Across sectors, the best performing funds were Energy/Materials within the Equity Long/Short family and the worst sectors were EM focused funds which returned -2.4% in November.

In all, when we use the more comprehensive HFRI monthly indices we get a similar picture to two weeks ago: "hedge funds did not have enough beta to the Trump trade, i.e. the Trump trade is underowned." In fact the picture we get from the chart below, from the monthly reporting hedge funds is even more disappointing that the picture from the daily reporting funds (top chart), as currency hedge funds are no longer outperforming. Instead, currency hedge funds returned -0.2% on the monthly indices (Figure 5).

And since the "Trump trade" remains underowned, and since the last-minute scramble to bid up stocks due to FOMO and year and bonus considerations is about to be unleashed in earnest, it is likely that the broader market meltup will continue until all marginal - and desperate - hedge fund price setters have allocated their year-end capital to what is now the absolute consensus trade not only for 2017, but the 3 other years under Trump's presidency.