Hedge funds haven't had an easy past decade, as a bull market in equities and low volatility and ultra-low interest rates hurt certain strategies. In recent weeks, however, parts of this sector are posting impressive results.

The COVID-19 pandemic hammered equities in March but macro-strategy hedge funds that profit from shifts in currencies, interest rates and other economic gauges gained sharply, underlining why a blend of strategies can spread risk.

Figures from Chicago-based Hedge Fund Research showed that its HFRI Macro (Total) Index gained by 2.1 per cent in March. Commodity trading advisors, which use futures, options and other derivatives to take market positions, did particularly well in the month. CTA gains were attributed to trading long and short positions across fixed income, equity, currencies, metals, and energy commodities

“Uncorrelated, defensively and long volatility-positioned hedge fund strategies posted impressive, negatively-correlated gains for the month, while directional equity-sensitive, long-biased, and arbitrage strategies posted sharp declines,” Kenneth J Heinz, president of HFR, said. 

Some investments have shone in the tough market conditions. The dollar share class of UK-listed BH Macro Global logged a net asset value (NAV) gain of 11.7 per cent in the first three weeks of March, putting it up 14.9 per cent in 2020.

“I am sure they [clients] are breathing a sigh of relief that BH Global is anchoring some of their losses,” Sir Michael Bunbury, chairman of BH Macro Global, told this news service in a recent call. “You are going to use this as a safe harbour fund…it is incredibly desirable….it is not easy to find uncorrelated assets.”

BH Global is intended to have a very low or even negative correlation with the equities market. Risk management and a clear policy to manage share price NAV discounts are rigorously enforced, Sir Michael said.

The way that hedge fund strategies can add some insurance to a portfolio – rather in the way that gold is supposed to do – will not be lost on a wealth sector that may have grown weary of the industry in recent years. But just as positive hedge fund returns after the dotcom bubble burst in 2001 encouraged a flood of money into funds, the same results might encourage an inflow. Some results have created headlines. Singapore-based QQQ Capital (9 March, Bloomberg) chalked up a whopping 70 per cent return in the first two months of the year as stock markets sold off. The same process happened in 2007-2008 when certain funds correctly predicted the sub-prime mortgage rout. 

But as the HFR figures show, other strategies have been hit.  Across the whole space, the HFRI Fund Weighted Composite Index® fell by 5.9 per cent in March, while the HFRI 500 Hedge Fund Composite Index lost 6.2 per cent. For some historical context, the March decline of the HFRI FWC falls below the 6.8 per cent drop in October 2008 and well below the record 8.7 per cent decline in August 1998.

Among other figures, HFR said fixed income-based Relative Value Arbitrage (RVA) strategies logged mixed gains in March on with long volatility exposures offsetting arbitrage spread widening. The investable HFRI 500 Relative Value Index gained 0.7 per cent driven by the HFRI 500 RVA: Volatility Index, which surged by 8.9 per cent. (A relative value fund seeks to exploit temporary differences in the prices of related securities.)

Liquid Alternative hedge funds fell in March, with the HFRX Absolute Return Hedge Fund Index down by 5.5 per cent. The HFRI-I Liquid Alternative UCITS Hedge Fund Index lost 5.6 per cent. (Liquid alternative funds typically are quoted vehicles that invest in certain strategies; the sector has been controversial because some commentators argue that hedge funds, by their nature, tend to be illiquid.)