February marked another significant shift in hedge fund performance, bringing continued recovery to some strategies and a resumption of challenges to others. The overall weighted-average return for hedge funds administered by the Citco group of companies was 0.1% for February, bringing their year-to-date return to 3.62%.
Meanwhile, other data sources show a similar story. The PivotalPath Composite Index also generated a return of 0.1% for February as the equity markets plummeted, bringing its year-to-date return to 2.3%. Goldman Sachs reported an overall global simple average of -0.1% for the month, bringing its year-to-date return to 3.4% for the funds reporting to it.
For comparison, the S&P 500 slipped 2.4% in February, while the Russell 2000 was off by 1.8%, and the Nasdaq declined 1.1%.
Fund returns by strategy
Only 46% of the hedge funds administered by Citco were in the green for February, highlighting just how widespread the difficulties were in February. The median return of was -0.1%, indicating that the challenges facing hedge funds last month were generally spread across funds of all sizes.
Event-driven was the best-performing strategy by far in February, with a weighted-average return of 3.3%, continuing the momentum they enjoyed in January. However, the strategy was flat on a median basis, indicating that larger event-driven hedge funds performed significantly better than smaller ones.
Equities was the second-best strategy last month, with a weighted-average return of 0.5%. However, the strategy was in the red on a median basis with a return of -0.6%, suggesting again that larger equities funds outperformed smaller ones.
On the other hand, the two worst-performing strategies last month were multi-strategy and commodities, both of which were in the red. They were neck and neck with weighted-average returns of -0.8% and -0.7%, respectively.
However, multi-strategy funds were flat on a median basis, while commodities funds only declined 0.3% on a median basis, indicating that smaller funds utilizing those strategies outperformed their larger counterparts.
On a weighted-average basis, fixed-income arbitrage and global macro funds generated minuscule returns of 0.2% and 0.1%, respectively. Fixed-income arbitrage funds generated a median return that matched their weighted-average return at 0.2%, while global macro funds were flat for February.
PivotalPath returns by strategy
Turning to PivotalPath, which tracks over 2,500 “institutionally relevant” hedge funds accounting for more than $2.5 trillion in assets, managed futures was the best-performing strategy last month with a return of 1.8%. Equity quant funds returned 1% for February, followed by global macro funds at 0.9% and credit funds at 0.5%.
The multi-strategy funds tracked returned 0.2% for February, although the remaining strategies were all in the red for the month. The worst-performing strategy was equity sector, which declined 0.9%, followed by equity diversified with a return of -0.5%.
Interestingly, event-driven, Citco’s best-performing strategy, was one of PivotalPath’s worst-performing strategies, with a return of 0.3% for February.
On a year-to-date basis, equity sector was the best-performing strategy, with a return of 3.3% for the first two months of 2023, followed by equity diversified, with a return of 2.7%. The third- and fourth-place strategies followed close on the heels of equity diversified, as event-driven funds are up 2.6% year to date, while credit hedge funds have gained 2.5%.
None of the strategies tracked by PivotalPath is in the red for the first two months. The worst-performing strategy on a year-to-date basis is managed futures, which saw a significant reversal of fortunes as February’s industry-leading strategy enjoyed a monthly return that more than offset January’s damage.
Equity quant funds also saw a major recovery as their February return of 1% brought them into the green year to date with a return of 0.1%.
Alpha by strategy and size
PivotalPath also tracks hedge fund alpha by strategy. Overall, the Composite generated 3% alpha for the 12-month rolling period ending in February.
Managed futures and global macro repeated the number one and two positions, respectively, that they grabbed in January. For the 12-month period that ended in February, managed futures funds have generated 10.7% alpha, while global macro funds stand at 8.9% alpha.
All other strategies are lagging significantly, with credit and multi-strategy landing in the third- and fourth-place positions at 3.1% and 3% alpha for the 12-month period. Equity sector and event-driven funds have generated negative alpha over the last 12 months, at -2.8% and -0.2%, respectively.
Managed futures and global macro were also the top two strategies for alpha generation in 2022, with credit coming at a distant third place with 2.2%. For 2022, equity sector and event-driven funds were again the worst performers in alpha generation, coming in at -9.5% and -2.3%. All other strategies generated positive alpha in 2022 except for equity diversified, which came in at -1.2%.
Based on size, PivotalPath reported that larger funds outperformed their smaller counterparts because of the concentration of large managed futures and multi-strategy funds. The firm reported that the dispersion based on the spread between the 75th and 25th percentile returns declined from January to February.
However, all asset size groups are positive year to date. Funds with over $5 billion in assets under management were up 0.33% for February, bringing their year-to-date return to 2.05%. All fund sizes starting with $500 million to $1 billion and going to the bottom at less than $100 million were in the red for February.
The best-performing size groups year to date are $1 billion to $2.5 billion, at 3.25%, $100 million to $250 million, at 3.14%, and $250 million to $500 million, at 2.94%.
Interestingly, while only 46% of the hedge funds administered by Citco generated positive returns for February, 52% were in the green for the month.
Investors continued to pour more capital into funds administered by Citco last month, as evidenced by the $400 million in net inflows as $6.6 billion worth of subscriptions more than offset the $6.2 billion in redemptions.
The firm reported small net inflows into most strategy types, with global macro and multi-strategy hedge funds being the most popular, with $300 million in net inflows each. Only event-driven and funds of funds recorded net outflows for February, amounting to $400 million and $100 million, respectively.
As far as size, the largest subscriptions for funds with $1 billion to $5 billion in assets under administration and funds with $5 billion to $10 billion in assets. These groups recorded $200 million in net inflows each.
Looking ahead, the Citco team sees sizable investor redemptions planned for the coming months. They observed only $400 million in subscriptions and $13 billion in redemptions planned for March, resulting in net outflows of $12.6 billion. Beyond the first quarter, Citco observed no subscriptions and $9.7 billion in redemptions planned.
The current macro environment for hedge funds
Goldman Sachs and PivotalPath outlined the current macro picture for hedge funds. Goldman noted that receding inflation and rate hike fears led to a positive start to 2023, but February brought a return to the uncertainty that ruled 2022.
Last month, investors were forced to rethink the speed at which inflation will slow following a robust U.S. jobs market and a surprise uptick in PCE data. Investors also had to reevaluate their expectations of the Federal Reserve’s upcoming rate hikes.
According to Goldman, the shift in interest rate expectations triggered a decline in asset classes across the broader markets. The firm added that equity fundamental long/ short hedge funds declined 0.6% in February due to beta losses and slight negative alpha. Goldman reported that losses on the long side outweighed the gains on the short side in February in a reversal of January’s dynamics.
PivotalPath deemed inflation as continuing to be “pesky and sticky,” also citing increasing recession fears and a chance of a hard landing due to the Fed’s commitment to a 2% inflation target. While January brought positive global equity performance, most major indices in Asia and the U.S. tumbled in February, led by the Hang Seng’s 11.4% decline.
All the U.S. equity sectors declined in February except for technology, which rose 0.4%. Of note, biotech tumbled 6.9%. Energy also fell 6.9% as natural gas reached a low level not seen since 2020 before rebounding. Real estate was off by 5.9%, while healthcare declined by 4.6%.
The yield on the 10-year Treasury rose 12% to 3.92%, while the yield on the two-year rose 15% to 4.82%, further inverting the yield curve and continuing to signal a recession. The VIX jumped 6.7% to 20.7.