06/07/2019 Market Commentary

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Relative Value Arbitrage mixed as US yield curve inverts; Blockchain Index surges on Cryptocurrency gains
CHICAGO, (June 7, 2019) – Hedge fund performance fell in May, posting the first monthly decline for 2019, as global equities suffered steep losses amidst ongoing trade negotiations and the inversion of the US yield curve, according to data released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry.
The HFRI Fund Weighted Composite Index® (FWC) Index fell -1.5 percent for the month, topping US equities by 480 basis points (bps), as losses across equity-sensitive strategies were only partially offset by mixed performance across fixed income-based Relative Value Arbitrage (RVA) exposures. The May decline pares the YTD return of the HFRI FWC to +5.3 percent. Approximately 87 percent of hedge funds outperformed the S&P 500 for the month, with the top decile of funds gaining +5.1 percent, while the bottom decile fell by -8.7 percent.
The HFRI 500 Fund Weighted Composite Index, an investible index of 500 leading hedge funds, posted a narrow decline of only -0.3 percent for the month, topping US equities by over 600 bps. Liquid Alternatives fell moderately in May, as the HFRI-I Liquid Alternative UCITS Index lost -0.94 percent for the month. The HFRI-I Liquid Alternative UCITS Macro Index declined -0.38 percent in May, while HFRI-I Liquid Alternative UCITS Equity Hedge Index fell -1.52 percent.
The HFRI Equity Hedge (Total) Index led strategy declines for the month, falling -2.4 percent, the first decline since December 2018 and paring the YTD return to +6.8 percent. Directional and Market Neutral EH sub-strategies produced a wide disparity of sub-strategy performance, as the HFRI EH: Quantitative Directional Index fell -3.6 percent, while the quantitative, factor-based HFRI EH: Equity Market Neutral Index gained +0.9 percent. Larger Equity Hedge funds produced more moderate declines for the month, as the HFRI 500 Equity Hedge Index fell only -0.5 percent.
Credit-sensitive, fixed income-based Relative Value Arbitrage strategies generated mixed performance as the US yield curve inverted, with gains in Volatility and Asset Backed strategies offset by declines in Multi-strategy and Corporate bond exposures. The HFRI Relative Value (Total) Index declined narrowly by -0.2 percent for the month, as performance was led by the HFRI RV: Volatility Index, which gained +2.2 percent, and the HFRI RVA: Asset Backed Index, which added +0.4 percent. Offsetting these gains, the HFRI RV: Multi-Strategy Index fell -1.3 percent. Larger RVA funds produced a narrow gain in May, as the HFRI 500 Relative Value Index added +0.04 percent.
The M&A-sensitive HFRI Event-Driven (Total) Index declined for the month, losing -1.4 percent, driven by the HFRI ED: Activist Index, which fell -4.1 percent, and the HFRI ED: Special Situations Index, which dropped -2.2 percent. Larger Event-Driven funds produced more moderate declines for the month, as the HFRI 500 Event-Driven Index fell only -0.4 percent.
The HFRI Macro (Total) Index lost -0.6 percent in May, as declines in Commodity and quantitative, trend-following CTA strategies were only partially offset by gains in Multi-Strategy exposures. The HFRI Macro: Commodity Index fell -0.5 percent for the month, while the HFRI Macro: Systematic Diversified Index declined -1.7 percent. These losses were partially offset by the HFRI Macro: Multi-Strategy Index, which advanced +1.8 percent, and the HFRI Macro: Currency Index, which added +0.5 percent. Larger Macro funds produced more moderate losses for the month, as the HFRI 500 Macro Index fell only -0.2 percent.
Risk Premia strategies posted mixed returns for the month as risk-off sentiment dominated performance trends, while losses in Commodity and Credit strategies were only partially offset by gains in Rates. The HFR BSRP Commodity Index fell -12.8 percent in May, while the HFR BSRP Credit Index lost -9.3 percent. Partially offsetting these declines, the HFR BSRP Rates Index gained +2.2 percent for the month. Risk Parity strategies fell for the first time in 2019, as the HFR Risk Parity Vol 15 Index dropped -1.3 percent in May, paring YTD performance to +14.5 percent. Cryptocurrency funds surged for the fourth consecutive month, with the HFR Blockchain Composite Index vaulting +45.4 percent in May, extending gains from the prior three months and bringing YTD performance to +81.7 percent.
“Hedge funds declined in May though outperformed steep global equity market losses, as fluid and ongoing trade tariff negotiations drove powerful risk-off sentiment across financial markets, paring early 2019 gains and tempering optimistic near-term growth expectations. Areas of hedge fund outperformance included uncorrelated and low-beta exposures of Relative Value Volatility, Macro Multi-Strategy, and factor-based Equity Market Neutral, as well as volatile Blockchain and Cryptocurrency exposures,” stated Kenneth J. Heinz, President of HFR. “The macroeconomic environment has very quickly shifted from a V-shaped recovery to expectations for a W-shape, with the possibility of Federal Reserve interest rate cuts in 2019. This near-term adjustment has contributed to an expansion of the opportunity set for specialized long-short investments, and funds positioned for this environment are likely to lead industry performance through mid-year.”
Comments reference Flash Update performance figures as posted on June 7, 2019.