For much of 2017, hedge funds - most of which again underperformed both their benchmark and the broader market - complained that they were not generating alpha for one reason: there was no volatility. Well, they got their wish in spades last month when after months of record low, single-digit VIX, equity vol exploded 47% resulting in a 3.9% slide in the S&P 500 and as 10-year yields backed up to 2.86%.
And so with volatility spiking, and what every commentator saying it was a "stockpicker's market" hedge funds surely had a blockbuster month, right?
Well, no, quite the opposite in fact because according to the Bloomberg Hedge Fund database, in February hedge funds posted an overall drop of 2.19%, wiping out all of January's gains, and leaving them flat for the year. Yes, somehow the month that all hedge funds were waiting for lead to widescale losses and last month ended up being the worst month for hedge funds since January 2016, when they slumped 2.57%.
Hardly surprising, Commodity Trading Advisors (CTAs) and Managed Futures strategies had the worst drop for both February and the year, falling 6% in the month and 3.02 year to date, as previously reported. The move was so acute, that JPM warned the record drop could become an extinction level event for the CTA space.
Meanwhile, Macro Funds saw the second-largest monthly drop, slipping 2.31% according to Bloomberg, and underperforming the hedge fund database by 12 basis points. Fixed Income Relative Value Funds were the only group spared, ending the month up 0.06 percent.
A breakdown by strategy reveals the following:
- Systematic and Discretionary CTA fell the most at 6.87% and 6.19%, respectively, as about 88 percent [23 of 26] of the strategies were down in February.
- Currency strategies posted the biggest gains for the month at an average 2.24%, below their 3-month average of 3.39%, putting them in the red for the year at 1.62 percent.
- Long-Short funds finished February down 1.47%, outperforming the S&P by 222 basis points.
- Emerging Markets, the third best style in 2017 and best YTD, fell 1.03 in February, as markets contracted outside the U.S.
Despite the disastrous February, however, hedge funds can still salvage their year if no more volatility spikes take place: as Bloomberg adds, five of the eight strategies maintained positive results for the year, paced by Equity Hedge funds, the best performers in 2017, at 1.04%.
Fixed Income Relative Value funds followed closely at up 1.02 percent for the year after barely breaking even for the month. Event Driven funds were also in the black, up 0.92 percent for the year, overcoming a monthly of 0.99 percent.
Health Care-focused funds were down 0.64 percent in February, reversing gains in January of 4.6 percent. Energy-focused funds dropped 3.7 percent for the month, after gaining of 2.6 percent in January.
What about specific names? Here, courtesy of the latest weekly HSBC hedge fund tracker, are the Top and Bottom 20 hedge funds YTD, and a site one doesn't often see: Greenlight dead last of all hedge funds that submit their performance.
There is a problem, however, if today's tech selloff accelerates. As we showed last month, virtually every hedge fund is long tech names, with 4 of the 5 most widely owned names Amazon, Facebook, Google and Microsoft.
If the selling in these names, which were largely responsible for the market's outperformance in 2017 begins, watch out below.