Hedge funds made money in February’s broad market rally and in the absence of significant macro events, according to Man’s monthly Hedge Fund Overview research which analyses the industry using several data sources. The HFRI Fund of Funds Composite was up 2.2% for the month and up 5% since the start of 2012 to end of February.
Equity-hedged managers led as the decline in stock-specific correlations helped stock-pickers generate alpha. Managed futures managers with a long-term trend following bias also thrived, with high exposure to equities and energies helping performance. Upward moves in these asset classes also supported the global macro style, while relative value and event-driven managers also posted gains thanks to a rally in credit markets.
The market environment was supportive and improved sentiment helped global equities to post gains. The MSCI World Index gained 4.7% over the month. Commodities prices generally pushed higher, with the S&P GSCI Index gaining 6.1% thanks to strong rise in Brent of 10.5%. However, bond yields fell as investors swapped safe-haven assets for more risky assets.
“Hedge funds have made a good start to the year and participated in the broader market rally through high quality security selection and exposure to key commodities markets. Risk appetite remains subdued, however, and we see this positioning continuing until a macro or political event triggers a change in the market environment,” Michelle McCloskey, Man’s head of hedge fund research, said.
The HFRI Equity Hedge Index gained 3% in February, thanks largely to a global equity rally. This took gains to 6.9% for the first two months of 2012. Investors were encouraged by a drop in equity market volatility, indicated by the CBOE VIX Index falling -5.2%, but notable performance dispersion remained among managers watched by Man, with returns ranging from 5.5% to -6.5%. Cyclical and growth-sensitive sectors such as IT (7.0%), Consumer Discretionary (6.0%), and Financials (6.0%) outperformed, according to MSCI/Bloomberg data.
Managed futures managers experienced another positive month in February, with the HFRI Systematic Diversified Index up 1.0%. Long-term trend followers generally fared better than short-term traders as manager performance ranged from 7.8% to -3.0%. Those with high allocations to equities and long bias to commodities – especially energies – were rewarded, while long bond positions hurt managers slightly.
The global macro style also performed well with the HFRI Macro Index gaining 1% in February. A risk-on environment and improved liquidity benefitted emerging markets-focused managers. Receding fears of a Greek debt default also helped confidence, while geo-political risks in the Middle East supported energy markets price gains.
Relative value managers continued their good run of form in February, with the HFRI Relative Value Index gaining 1.8% on tightening credit spreads, buoyant equities and improved liquidity. Fixed income arbitrageurs traded around central bank policy easing, while convertibles arbitrageurs reported a pickup in outright buying causing the Barclays Capital Global Convertibles Index to rise 2.5%.
Event driven managers also enjoyed a strong month as the HFRI Event Driven Index gained 1.9%. Positive performance was seen in all sub-strategies. In particular, distressed managers benefitted from robust credit markets, and merger arbitrageurs’ performance was lifted by tightening corporate M&A spreads.