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Kenneth Heinz, HFR

Hedge funds decline in February as sub-strategies diverge and global equities fall

Hedge fund performance fell in February as global equities declined, ending a streak of fifteen consecutive monthly gains for the broad-based HFRI Fund Weighted Composite Index.

The HFRI FWC declined 1.8 per cent for the month, led by losses in quantitative, trend-following CTA strategies, though all main strategy areas experienced losses for the month, according to figures released by HFR.
The February decline was the largest since January 2016 and pares the Index Value to 14,134, ending a streak of fourteen consecutive record monthly index levels. Inclusive of the February performance, the HFRI FWC has gained 0.5 per cent YTD 2018.
Macro hedge funds posted the largest drop among the main strategies as US equities fell and interest rates climbed on expectations of accelerating inflation. The HFRI Macro (Total) Index fell 3.9 per cent in February, the largest decline since February 1994; the HFRI Macro Index (Asset Weighted) lost 2.8 per cent for the month. Quantitative trend-following CTA strategies diverged with Discretionary Fundamental Macro strategies during the period as the HFRI Macro: Systematic Diversified Index sharply declined by 6.5 per cent, the largest monthly loss since inception, and offset the 2.8 per cent gain in January. The HFRI Macro: Discretionary Thematic Index fell -0.2 per cent, slightly pulling down YTD performance to +1.5 per cent. The HFRI Macro: Currency Index led all sub-strategies with a +1.2 per cent gain for the month, while the HFRI Macro: Multi-Strategy Index dropped 1.5 per cent.
Equity Hedge funds also declined in February, though losses were partially offset by exposure to Technology. The HFRI Equity Hedge (Total) Index lost 1.5 per cent, partially offsetting the +3.0 per cent return in January, and bringing the YTD 2018 return to +1.4 per cent, which leads US equities for both February and YTD. The HFRI EH: Quantitative Directional Index led EH sub-strategy declines for the period, falling 2.3 per cent, however, partially offsetting these losses, the HFRI EH: Technology Index gained 0.4 per cent, bringing the YTD Index return to +4.8 per cent. The HFRI EH: Energy/Basic Materials Index fell 0.9 per cent for the month, while HFRI EH: Equity Market Neutral lost 0.6 per cent.
Both Event-Driven and fixed income-based Relative Value Arbitrage strategies declined less than 1 per cent in February, as several sub-strategies posted negatively-correlated gains for the month. The HFRI Event-Driven (Total) Index fell 0.6 per cent, paring the YTD gain to 0.7 per cent. The HFRI ED: Special Situations Index declined 1.4 per cent, while the HFRI ED: Distressed Index partially offset strategy losses by advancing 0.2 per cent. Similarly, the HFRI Relative Value (Total) Index fell 0.6 per cent in February, paring the YTD return to +0.5 per cent. RVA sub-strategy declines were led by the HFRI RV: Volatility Index, which fell 2.2 per cent, though sub-strategy losses were partially offset by the HFRI RV: Fixed Income-Asset Backed Index, which advanced 0.9 per cent for the month.
Risk Parity strategies also declined as equities fell and interest rates increased, with the HFR Risk Parity Vol 10 Index falling 2.8 per cent, while the HFR Risk Parity Vol 15 Index dropped 4.3 per cent for the month. Cryptocurrency funds also declined, though they pared steep intra-month losses as many cryptocurrencies partially recovered by month-end, as the HFR Blockchain Index fell 9.5 per cent for the month.
“Hedge funds declined in February for the first time since October 2016, as long latent global equity market volatility soared and US interest rates increased, with certain hedge fund sub-strategies posting impressive, negatively-correlated gains through the volatility spike,” says Kenneth J Heinz (pictured), President of HFR. “Despite the decline, the thematic drivers of hedge fund performance have not changed and, in fact, may actually have accelerated throughout the month. US inflation and interest rates, trade negotiations and the newly proposed tariffs, corporate M&A, and continued application of blockchain technology are likely to drive industry performance, creating both long and short opportunities, throughout 2018.”

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