Citi Reviews Performance of Hedge Funds in February

Citi has released its Hedge Fund Industry Snapshot for March 2015, reviewing the performance, assets under management and other trends of hedge funds in February. The report is packaged as a pdf and loaded with charts and graphics that help bring the data to life.

February Performance

Composite hedge fund performance, as measured by the HedgeFund.net and Hedge Fund Research equal-weighted indexes, was strong in February, at +1.88% and +2.02%, respectively – the largest monthly gains in a year. This brings the year-to-date returns of the two measures to +1.72% and +2.51%, through February 28.

The top performing strategies in February were distressed credit (+2.99%), long/short equity (+2.80%), and event driven (+2.40%). The worst performers were dedicated short bias (-1.37%), managed futures (+0.10%), and global macro (+0.48%).

February Hedge Fund Performance by Strategy

In all, assets invested in hedge funds swelled by $60.8 billion in February. Of this total, $12.1 billion is attributable to net inflows, while the remainder was due to the $48.7 billion in capital appreciation – the highest total since December 2011. The $12.1 billion in net inflows, although a small portion of the total AUM gain, marks the first period of positive inflows since November.

February Monthly Change in Industry Assets and Composition

Performance by Size

Smaller was better for hedge funds in February, as the median single funds Citi classifies as “small” (less than $100 million AUM) gained 2.3%; while the largest single funds (greater than $500 million AUM) had the smallest gains at +1.7%. Those in the middle returned 1.83% for the month.

Assets and Funds

Long/short equity funds continue to be the most popular hedge funds in terms of AUM and number of funds. According to Citi, long/short equity funds account for 27.2% of all hedge fund assets and 33.9% of all hedge funds. Global macro ranks second in both categories, at 21.1% and 16.2%, respectively.

Fixed income arbitrage funds rank third in terms of AUM (14.8%) and fourth in terms of the number of funds (9.9%), while managed funds rank fourth (13.2%) and third (12.1%), respectively.

Multi-strategy funds are fifth by both measures, while event driven, market neutral, and emerging markets shares spots #6-8. Convertible arbitrage, distressed, and dedicated short bias strategies are the least popular by AUM and number of funds.

February Hedge Fund Assets and Funds by Strategy

Risk vs. Reward

Distressed credit bounced back big in February and it continues to top Citi’s list of the best risk-adjusted performers over the past 10 years. Dedicated short bias has been the worst, which is understandable given the broad market’s general bullishness (even with the 08-09 crash) over the past decade.

Sharpe Ratios Feb 05 - Feb 15

The downside for individual investors is that distressed credit is difficult to package in liquid alternative mutual funds and ETFs, which means that most non-accredited investors have difficulty gaining exposure to the strategy.

Shorts and Leverage

The financial and technology sectors attracted the most hedge-fund industry interest in February. Short-sales of financials increased by 43.1% for the month, while tech-sector short covering increased by 19.6% over the month. Shorting of energy sector stocks decreased by 31.3% as energy stocks bounced along a near term bottom over the month.

Citi calculates the gross leverage employed by hedge funds around the globe at 2.35x, up from 2.29x in January. Arbitrage, global macro, and multi-strategy styles are using the most leverage, while distressed credit is using the least. Leverage levels have creeped up slowly over the last year from gross leverage levels of roughly 2.12x.

Conclusion

Citi’s March 2015 Hedge Fund Industry Snapshot includes dozens of charts and graphics that aid the interpretation of the data. Other topics examined include hedge fund leverage ratios, daily changes in gross leverage, the HARP index vs. the HFRIFOF index, lending sector short flows, and more.

For more information, visit the Business Advisory link on Citibank’s Prime Finance website.

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