06/28/2016 Market Commentary

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Defensive, hedged positioning across Sterling, equities, gold mitigate losses; Quantitative, Trend Following CTA’s post strong gain on Brexit Friday
CHICAGO (June 28, 2016) – Hedge fund managers navigated intense volatility on Friday as the historic Brexit vote resulted in massive dislocations across global currency, equity, commodity and fixed income markets, most specifically reflected in the British Pound Sterling, which posted a steep decline against the US Dollar and Japanese Yen. Hedge fund performance was mixed across strategies with wide dispersion and high turnover, as losses across directional beta strategies were partially offset by mixed performance in non-directional and trend following strategies. UK-based hedge funds manage an estimated $426.4 billion (£ 323 billion British Pound Sterling), roughly 80 percent of the $527.6 billion managed by all European located hedge funds.
The HFRX Absolute Return Hedge Fund Index posted a decline of -0.18 percent on Friday, while the HFRX Equal Weighted Index declined -0.76 percent, according to data released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry. The HFRX Global Hedge Fund Index posted a decline of -1.06 percent on Friday, with gains in CTA strategies offset by declines in Equity Hedge strategies; Macro and Relative Value Arbitrage strategies experienced mixed performance on Friday.
Fundamental Macro and quantitative, trend following CTA strategies experienced mixed performance on Friday as the British Pound Sterling plunged to a 30 year low against the US Dollar, with the HFRX Macro: Systematic Diversified/CTA Index gaining +0.71 percent on Friday. The HFRX Macro Index, which includes both fundamental & quant CTA strategies, posted a decline of -0.55 percent on Friday, as positioning in the British Pound Sterling, Japanese Yen, Euro, Gold, global equities and fixed income all contributed to Friday performance.
The HFRX Relative Value Arbitrage posted a narrow decline of -0.25 percent on Friday, as yields declined sharply across government bonds, high yield credit widened and equities posted steep declines. The HFRX Convertible Arbitrage Index posted a narrow decline of -0.07 percent on Friday as rates fell sharply, volatility spiked, credit widened and equities declined.
Directional equity beta and Event Driven strategies posted declines on Friday, as UK equities fell over -3.1 percent, while US equities declined over -4.0 percent, the German DAX fell nearly -7 percent; equities in France, Italy and Spain posted even steeper losses. The HFRX Event Driven Index posted a decline of -1.07 percent on Friday; the HFRX ED: Merger Arbitrage Index posted a narrow decline of -0.02 percent for the day. The HFRX Equity Hedge Index posted the largest decline across main hedge fund strategies on Friday, falling -2.13 percent.
“Many hedge funds were defensively positioned coming into the Brexit vote, reflecting expectations for a close popular vote as well as the systemic risks associated with a surprise result, which was heightened by gains in sterling and equity markets leading into the vote,” stated Kenneth J. Heinz, President of HFR. “Many hedge funds had entered Brexit risk trades in 2H15 and had profitably exited these prior to the vote, reflecting the asymmetric risk profile these trades carried as a result of the disconnect between polls and financial market expectations for the vote outcome. Managers are and have been positioned for this dramatic increase in volatility to persist over an intermediate timeframe, reflecting an enhanced opportunity set for funds which are able to operate as liquidity providers through this turbulent period of heightened risk and uncertainty.”