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Chopping Hedge Fund Data and Joining a Choir

mjkThe independent data provider Eurekahedge has issued a report on the world’s hedge fund industry, telling us that hedge funds globally are up modestly, just 0.78%, year to date (that is, through April).

Returns for April itself were negative, as they were in March as well.

All this puts the HF industry just a smidge ahead of the MSCI World Index, which returned 0.75% YTD.

Results vary wildly from one region to another, as the table below indicates. This is unsurprising because headlines have varied so much from one region to the other. In the United States, the Federal Reserve has persisted in its scaling-back of the various rounds of post-crisis quantitative easing, and is doing this despite what Eurekahedge calls disappointing 1st quarter growth numbers.

Meanwhile, “the Eurozone continued to post a recovery in economic activity, but a strengthening euro and below expectation inflation data remained a source of worry.”

Digression: Anti-Keynesian Screed

In saying this, Eurekahedge sings well within the chorus of conventional wisdom. Personally, I have to dissent.

I don’t believe that the market is treating “below expectation inflation data” as a negative at all. This is just part of the use of “deflation” or “disinflation” as bogeymen. It is unfortunate that so many people who do know better go along with the bogey.

The underlying idea seems to be the Keynesian one that a healthy economy is one that is kept in a more-or-less permanent state of stimulus by moderate but continuous doses of depreciation of the relevant currency. That a currency should ever appreciate or even slow the rate of the depreciation on which the wise and scholarly have settled for it sounds disastrous in itself to those who have internalized this mindset. To those of us who haven’t, the inferences drawn from it will naturally also leave us cold.

But let’s get back to the numbers. The table below shows the results broken down by regional mandates. North American managers have done best YTD, with gains of 2.16, followed by their colleagues of Europe and Latin America, with 1.03% and 0.38% respectively.

Regional Indices April 2014 YTD 2013 Returns
North America 0.12 2.16 10.02
Europe -0.59 1.03 8.85
Eastern Europe & Russia -1.78 -9.06 -1.26
Japan -0.38 -2.15 27.90
Emerging Markets 0.15 -0.39 5.23
Asia ex-Japan -0.70 -0.14 11.82
Latin America 0.77 0.38 1.93

Source: Eurekahedge

In Asia, markets have suffered from the slowing of the growth rate in China and from continued worries about Japan. Japan mandated hedge funds have, though, outperformed their underlying markets. The Nikkei slipped 12.20% in the same four months that saw the HFI fall less than a fifth that distance.

Size, Strategies, and Investor Sentiment

Nonetheless, a loss is a loss, and fund managers with a Japan mandate haven’t had a month in the black in 2014 thus far. Four consecutive losses have brought their YTD loss to -2.15.

Larger hedge funds are doing better than smaller ones. Accordingly, Eurekahedge’s asset-weighted index outperformed their plain-vanilla index.

Dividing the hedge fund world by strategy: fixed-income hedge funds did best in April, a month in which U.S. interest rates fell by six basis points. The fixed-income managers returned 0.69%. Also doing well: multi-strategy (0.57%) and arbitrage funds (0.51%).

Distressed debt managers were (slightly) in the red in April, down just 0.05. This news comes after and breaks an impressive string of positive returns – in each of the nine consecutive preceding months. Distressed debt funds continue to lead the returns tables on YTD results.

Long-short equity managers did poorly in April. Eurekahedge suggests that their losses in North America in particular may be traced to their exposure of tech stocks.

Macro funds are in negative territory YTD, as well as for April specifically. But Eurekahedge sees some hope for them. Macros have “reported gains from their exposure to equities and bonds of the Eurozone periphery where the theme of a visible recovery appears to be gaining momentum.”

Against all reason, the world’s qualified investors continue to think hedge funds are a good place to put money. Net asset flows YTD have crossed the $50 billion mark, with capital allocations to North American managers nearing $25 billion.