Introduction
January was not a happy start to the year for hedge funds as managers witnessed a drag in performance - down 1.20%1 during the month. Investor panic induced strong downward pressure on equity markets leading to a sell-off and the resulting capital flight to safe havens. The MSCI World Index2 declined 5.71% over the same period with much of the weakness in the global equity markets being led by Asia. Indeed, all eyes were on Asia in January as developments in East Asian economies along with a tumbling oil price took centre stage and sent ripples throughout the region and beyond. Equity market volatility dominated trading throughout the month as concerns over the health of the Chinese economy also added to the bleak market outlook. Oil found some support during the month as a cold spell in the US took some heat off China following a brief recovery in oil prices. Meanwhile, the Bank of Japan (BoJ) caught the markets by surprise in late January by announcing negative interest rates - this followed a dismal start to the year for Japanese equities with the Nikkei 225 declining 7.96% during the month.
All regional mandates were in negative territory during the month, with Asia ex-Japan hedge funds posting the steepest decline - down 3.15%, followed by Japanese hedge funds which lost 2.71%. Asia ex-Japan long/short equities hedge funds have taken a beating, with its Greater China long/short equities constituents down 5.96% in January as both the weak yuan and Chinese PMI data fuelled strong sell-off activity in the region. Across strategic mandates, CTA/managed futures managers posted gains during the month - up 2.32%, while other strategic mandates languished into negative territory. Short exposure into Asian equity futures paid off for some CTA/managed futures hedge funds. As investors flocked to safe havens, managers with exposure into the German Bund and the Japanese JGB also saw good gains. Long/short equities managers dropped by 3.04% during the month as global equities fell sharply; sector exposure into materials, energy and financials were among performance detractors. On the other hand, managers who were bearish on China realised returns despite the overall weakness in the region’s equity markets.
2016 is looking to be a volatile yet interesting year ahead with central bankers flailing their arms in pursuit of their inflation targets. We are still left to ponder a dreary conundrum of why and how policy ‘shots’ throughout the past year have ironically made the markets rather immune to stimulus.
Figure 1: January 2016 and December 2015 returns across regions
All regional mandates were down this month led by Asia ex-Japan and Japan focused hedge funds with losses of 3.15% and 2.71% respectively. North American managers declined by 2.03% while European and Latin American hedge funds lost 1.99% and 1.00% respectively. The year of 2015 saw Asia ex-Japan leading the table with gains of 7.97% followed by Japan with gains of 6.56%. Indeed, we presume that Asia ex-Japan’s ‘fall from grace’ was a result of the markets catching up with economic fundamentals as concerns over the Chinese economy and defensive measures to stem the weakening yuan culminated into investor panic. European managers also managed to post tidy returns of 4.74% last year while Latin American managers eked out a 0.66% gain over the same period. North American focused hedge funds were the only regional mandate which saw a drag in performance down 0.69% in 2015 – their worst annual return on record since 2008.
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