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Hedge Funds Performing Well Year-to-Date, But Trade Issues Loom Large

The Eurekahedge Hedge Fund Index continues to reflect strong performance for the year. First quarter 2019 was one of the strongest quarterly returns since the global financial crisis, and each of its three months was positive. April was another up month, +1.06%, which brings us to +5.15% YTD.

Hedge funds are supported by current conditions in the underlying markets, both equity and global. That is the gist of the latest Eurekahedge report. Global equity markets were up 3.38% for the month, as represented by the MSCI ACWI. Those underlying markets in turn have benefitted from accommodative central bank policies.

Looking at the Trade Talks

The report cautions, though, that some of the recent success of hedge funds and the underlying markets has depended on “optimism over the progress of the US-China trade talks.” That optimism counterbalanced “concerns over economic growth slowdown.” This may be worrisome, since the “recent development of the US-China negotiations pointed toward another escalation of the trade tension.” US President Donald Trump announced more tariffs in early May, and his administration has put Huawei on the “entity list,” limiting the business US companies can do with the Chinese telecom and consumer electronics giant.

Dividing the hedge fund world by region: Asia ex-Japan got by far the best results in March, better than 2%. Those mandates were somewhat less successful in April, just a hair better than +0.5%. Meanwhile, Japan mandates suffered a slight loss in March, but turned things around dramatically in April, up 1.37%. North American fund managers did nearly as well at 1.36%. Japan and North America were the top performers for the month.

Year-to-date, Asia ex-Japan and North American mandates have the strongest returns this far, courtesy of the equity performance of their respective regions. Asia ex-Japan is up 7.87% and North America up 6.73% YTD.

European mandates, plagued by Brexit and other sources of uncertainty, have the worst performance YTD of any of the regions, with a gain of only 3.37%.

North America accounts for 67.9% of the total assets under management tracked by Eurekahedge. Europe, the Middle East, and Africa constitutes 21.2%; Asia ex-Japan 7.2%; Latin America 2.7%, and Japan 0.8%. In terms of the absolute numbers of funds tracked, the order is the same: North America 5,596 funds; EMEA 3,769; Asia ex-Japan 1,238; Latin America 340; Japan 238.

Breaking down the numbers by strategies, event-driven hedge funds did the best in April, gaining 1.73%. They were followed by long/short equities hedge funds, up 1.44% for the month.

The asset-weighted Mizuho-Eurekahedge Index-USD for the industry was up 1.19% in April.

Most of the Mizuho-Eurekahedge indexes posted positive returns in April. The Mizuho-Eurekahedge Top 100 Index gaining 1.47% over the month. In terms of year-to-date returns, all the Mizuho-Eurekahedge indexes are in the black, with Asia-Pacific doing best.

Volatility Indexes

The CBOE Eurekahedge Volatility Indexes comprise four equally weighted volatility indexes—long volatility, short volatility, relative value and tail risk. They are designed to track the results of the respective vol-based strategies.

Long vol performed poorly in volatility muted April, losing 2.32%. Short vol as a strategy did correspondingly well, up 1.23%. Relative value (a strategy in which managers pursue short or long positions opportunistically) was in the positive numbers though not as well as short vol. Tail risk (a strategy the presumes that extreme market stress is more common that the market expects it to be) was slightly down.