08/05/2016 Market Commentary

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Fifth consecutive monthly advance driven by Technology, Activist; Emerging Markets, European funds also gain as equities recover Brexit declines 

CHICAGO, (August 5, 2016) – Hedge funds posted gains for the fifth consecutive month in July, the longest positive streak since 2013, driven by Equity Hedge and Event-Driven strategies, as equity and credit markets recovered Brexit losses. The HFRI Fund Weighted Composite Index ® (FWC) advanced +1.7 percent for the month, increasing the Index Value to 12,644.12 and bringing the YTD gain for the FWC to +3.0 percent, as reported today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry. All four main strategy indices were positive for July as gold surged, equities extended their recovery, and bond yields declined on a combination of moderation in global growth forecasts, as well as expectations for new economic stimulus measures. The HFRI Asset Weighted Index advanced +1.1 percent for the period, while the HFRI Fund of Funds Index gained +1.3 percent. 
Equity Hedge (EH) was the top performing strategy as post-Brexit global equity markets were by led by US, Germany, Japan, Spain, Brazil and Hong Kong. The HFRI Equity Hedge Index climbed +2.4 percent in July, the strongest gain since March, reversing the -0.5 percent decline in June. EH performance was led by the HFRI EH: Technology/Healthcare Index, which gained +2.9 percent for the month, while the HFRI EH: Fundamental Value Index added +2.7 percent. Emerging Markets hedge funds also advanced in July, with the HFRI Emerging Markets (Total) Index climbing +2.7 percent, led by a +4.0 percent gain from the HFRI EM: Latin America Index, which leads all regional indices YTD with +24.0 percent return. The volatile HFRI EH: Energy/Basic Materials Index leads EH sub-strategies YTD, with a +10.7 percent return. 
The HFRI Event-Driven Index advanced +2.1 percent in July, as equities recovered while credit and arbitrage deal spreads tightened; the ED Index leads all main strategies YTD with a +4.4 percent return. For the month, ED sub-strategy performance was led by Shareholder Activist strategies, as several concentrated positions advanced on constructive developments, with the HFRI ED: Activist Index returning +3.4 percent. The HFRI ED: Distressed Index posted its fifth consecutive monthly gain, advancing +2.6 percent and bringing YTD performance to +6.2 percent, leading all ED sub-strategies. 
Fixed income-based Relative Value Arbitrage (RVA) strategies also advanced for the period, as yields declined, credit tightened, and government bond yields in Germany, Japan and Switzerland remained negative. The HFRI Relative Value Index gained +1.4 percent in July, increasing the YTD gain to +4.1 percent, trailing only the HFRI ED Index for 2016. RVA sub-strategy performance was led by exposure to investment grade and high yield corporate credit, with the HFRI RV: Fixed Income – Corporate Index climbing +1.9 percent, bringing the YTD gain to +6.9 percent; the HFRI RV: Multi-Strategy Index advanced +1.5 percent for the month. The HFRI RV: Yield Alternatives Index leads RVA sub-strategies YTD with a +12.6 percent return. 
Macro strategies extended strong June performance in July, with the HFRI Macro Index advancing +0.8 percent for the month, bringing YTD performance to +3.7 percent. Building on strong trend-following performance in June, Macro sub-strategies were led by the HFRI Currency Index, which gained +1.64 percent, and the HFRI Macro: Multi-Strategy Index, which added +1.56 percent for the month. Through July, the HFRI Macro: Systematic Diversified Index leads Macro sub-strategies YTD with a gain of +5.2 percent. The HFRI Commodity Index was the weakest area of performance in the month, posting a decline of -1.7 percent.
“Hedge funds extended post-Brexit gains in July as global equities recovered losses, commodities fell and global interest rates declined further on weakening global economic data and outlook,” stated Kenneth J. Heinz, President of HFR. “The macroeconomic ‘new normal’ is highly abnormal and volatile, with more frequent asset dislocations creating opportunities both long and short for specialized strategies. Risk across financial markets has increased while investor risk tolerance has fallen, and funds tactically positioned for this environment are likely to generate strong gains and lead industry growth in 2H16.”    
Comments reference Flash Update performance figures as posted on August 5, 2016.