Citi Reviews October Performance of Hedge Funds

Citi October Hedge Fund PerformanceHedge funds reversed their September losses, posting monthly gains of between 1.18% and 1.66% in October, according to Citi’s Hedge Fund Industry Snapshot for November 2015. Global hedge-fund assets under management (“AUM”) rose by $47.6 billion through a combination of performance gains and new investor allocations, bringing the industry’s average monthly AUM gains to $6.2 billion for the year.

Strategy-wise, the top performers in October were emerging markets, long/short equity, and convertible arbitrage, which posted respective monthly gains of 3.74%, 2.73%, and 2.35%. The worst performers were dedicated short, CTA/managed futures, and distressed at -2.31%, -1.32%, and -0.59%, respectively.

By comparison, the long-only MSCI World Index gained 8% in October, and the U.S.-based S&P 500 gained 8.4%.

Returns by Size

Among single-manager hedge funds, size was a detriment to performance in October. The largest funds with more than $500 million in AUM posted monthly gains of 1.03%, while smaller single-manager funds with less than $100 million in AUM posted gains of 1.62%. Funds with between $100 million and $500 million in AUM split the difference with gains of 1.12%.

Nevertheless, large funds continue to hold a large majority of the industry’s overall AUM: 76% by Citi’s count. Small funds account for only 5% of total AUM.

Asset and Fund Trends

Long/short equity remains the most popular hedge fund category, accounting for 27.2% of AUM and 33.9% of all funds. Dedicated short bias – which has suffered for years under generally bullish broad-market conditions – is the least popular by both measures, accounting for just 0.1% of AUM and funds.

October 2015 Hedge Fund Breakdowns

Short Sales Show Shift in Sentiment

For many months in a row, consumer-discretionary and technology stocks were the most popular shorts for hedge funds. In October, however, financials jumped to the top of the short-executions pack, followed by technology and consumer-discretionary. Among short-coverings, technology and consumer-discretionary were #1 and #2, with financials ranking fifth behind industrials and healthcare. This means hedge fund managers swung into a decisively bearish stance against financials in October.

Risk and Returns

The strategies using the most leverage in October were global macro (4.33x), equity market neutral (4.20x), and multi-strategy (3.89x). Those using the least were distressed (1.05x) and emerging markets (1.44x). Industry-wide, leverage usage increased significantly in October to 2.73x assets, compared to 2.63x in October.

Citi’s Hedge Fund Industry Snapshot also includes 10-year Sharpe ratios for each of the strategies it covers.

Sharpe Ratios October 2005 to October 2015

Surprisingly, distressed is the top-performing strategy on a risk-adjusted basis over the past 10 years.

Conclusion

Citi’s Hedge Fund Industry Snapshot also includes monthly performance-dispersion data, broken down by strategy; as well as daily changes in gross leverage charts for each of its hedge-fund styles. Each style also has its own dedicated page in the 26-page document, comparing performance of funds by age, size, and against their benchmarks. The styles covered include:

  • Convertible arbitrage
  • CTA / managed futures
  • Dedicated short bias
  • Distressed
  • Emerging markets
  • Equity long/short
  • Equity market neutral
  • Event driven
  • Fixed-income arbitrage
  • Global macro
  • Multi-strategy

Although hedge-funds have struggled to outperform long-only traditional investments in 2015, heightened market volatility is still encouraging investors to increase their allocations to hedge funds. October was the seventh month in 2015 to see investor inflows, which year-to-date stood at $84.5 billion as of November 1.

For more information, visit Citibank.com.

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