Citi has released its Hedge Fund Industry Snapshot for February 2015, a comprehensive report detailing assets under management (AUM), performance, and asset flows for the hedge fund industry in general, as well as individually across several hedge fund strategies. The report also includes information concerning short sales, equity sector positioning by hedge funds, and a review of risk vs. return metrics by strategy.
Composite hedge fund performance, as measured by the HedgeFund.net and Hedge Fund Research equal-weighted indexes, was mixed in January, with the former producing losses of 0.52% while the latter generated gains of 0.27%. By comparison, the MSCI World Index lost 1.8% and the S&P 500 lost 3% – hedge funds thus outperformed both global and U.S. large-cap equities for the month of January. Investors who hedged non-US investments were bolstered by a strong dollar as the US Dollar Index gained 5.1%.
Individually, the top-performing hedge fund strategies in January were CTA / managed futures, which gained 4.4% in the aggregate; global macro, which gained 1.23%; and equity market neutral, which gained 0.82%. The worst performers were distressed, event driven, and emerging markets strategies, which posted aggregated losses of 1.87%, 1.37%, and 1.09%, respectively.
Emerging markets funds had the widest gulf between the best and worst performers from +10.7% to -23.2%. The best performing individual funds came from the CTA/ managed futures (19.5%), global macro (15.3%), and equity long/short (13.3%) categories; while the worst performers were from the emerging markets, event driven (-19.1%), and – surprisingly – CTA/ managed futures (-11.7%).
Overall, hedge funds experienced monthly investor outflows for the fourth time in twelve months, with investors pulling a net $1.8 billion in January. Nevertheless, performance gains of $3.2 billion resulted in total hedge fund assets growing by a little more than $1.4 billion for the month.
Assets and Funds
As of January 31, equity long/short funds continue to account for the largest share of hedge fund assets and number of funds, at 27.2% and 33.9%, respectively. Global macro funds are second in both categories, with 21.1% and 16.2%.
The least utilized hedge fund strategies, in terms of both assets and number of funds, are convertible arbitrage, distressed, and dedicated short bias strategies. Convertible arbitrage funds account for 2.3% of investor assets and 2.4% of total hedge funds. Distressed accounts for 1.2% of assets and funds, and dedicated short bias accounts for 0.1% of assets and funds.
The image below details the assets and number of funds for the full range of hedge fund strategies.
Risk vs. Reward
Sharpe ratio measures an investment’s “excess returns” (returns above the “risk-free rate of return”) per standard deviation unit, which is a measure of volatility. When comparing two investments, the investment with the higher Sharpe ratio has provided the better rate of return for the same risk – or, alternatively, the same rate of return for less risk.
In its Hedge Fund Industry Snapshot for February 2015, Citi includes the Sharpe ratios for each of the previously discussed hedge fund strategies, calculated over a 10-year period beginning in January 2005. As shown in the image below, distressed debt – the least accessible strategy for non-accredited investors – has had the best risk/reward characteristics over the past decade.
Citi’s Hedge Fund Industry Snapshot also includes extensive information concerning hedge fund short sales. For instance, it reports that shares of companies from the energy sector accounted for 20.7% of short-sale executions in January, up 37 basis points from the previous month. Consumer discretionary shares, by contrast, accounted for the plurality of short-cover execution – i.e. short-sale buy backs – with 18.26% of the total.
The report contains much more information, including as dozens of charts and graphics that bring the data to life. For more information, visit Citi’s Business Advisory page.