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Tail risk returns as short-volatility hedge funds post biggest loss since August 2015

Hedge funds were off to a good start in the first month of 2018, with the Eurekahedge Hedge Fund Index up 2.26 per cent in January. Among volatility-focused hedge funds though, short volatility hedge funds posted the worst performance in January 2018, down 3.30 per cent, their biggest loss since August 2015.

Long volatility and relative value hedge funds meanwhile, gained a modest 0.01 per cent and 0.16 per cent over the same period.
Underlying markets as represented by the MSCI AC World Index (Local) gained 3.78 per cent over the same period.
As the global risk on mode continued into January, trend following managers were positioned in good stead with holdings into equities and oil among performance contributors. Equity markets strengthened following the passing of tax reform in December, resulting in an increase of investments which drove US equities to all-time highs.
The Eurekahedge February Index Flash Update says: “Over in Europe, the growth momentum appears to be going strong with a strengthening Euro adding to gains for foreign investors in the region. Yield on sovereign bonds, particularly the Gilt and German bund, ended higher in January backed by positive signs of German coalition talks. Emerging markets led by Russia, China and Brazil have also contributed to strong gains for hedge fund managers as global risk appetite remains strong, with a weakening USD favouring exposure to EM markets where valuations remain relatively cheap. Among regional mandates, Latin American hedge fund managers topped the tables, gaining 4.47 per cent while CTA/managed futures managers posted the best returns, up 3.84 per cent among strategic mandates.
“While the full figures for February 2018 returns will start rolling in towards month-end, the spike in volatility in recent days has brought an end to the Trump rally. Short-volatility hedge fund strategies will likely see substantial losses in February, while tail-risk and long volatility strategies will finally see some redemption following double-digit losses during the exceptionally calm markets of 2017. If however this volatility spike is short-lived and the VIX trends lower towards the month end then long volatility managers will see their winnings get trimmed.”

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