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  • Hedge funds pick up the pace, as industry returns continue to rise in February
    by hugh.leask on March 8, 2021 at 6:00 pm

    Hedge funds pick up the pace, as industry returns continue to rise in February Submitted By Hugh Leask | 08/03/2021 - 6:00pm The hedge fund industry gathered further momentum during February, as managers generated positive performances across the strategy spectrum, with equities, macro, commodities, activist and cryptocurrency strategies generating particularly strong gains, new industry data shows. Amid rapidly-evolving developments on vaccinations, energy policy, and inflation rises, Hedge Fund Research’s main Fund Weighted Composite index surged 4.05 per cent in February, and is now up 5.35 per cent since the start of 2021.  Meanwhile, the investable HFRI 500 Fund Weighted Composite Index rose 2.22 per cent last month, and has generated 2.06 per cent during the first two months of the year, according to HFR’s monthly metrics, published on Monday. Overall, almost every hedge fund sub-strategy finished the month in positive territory, with equity hedge funds seizing on the retail trading spike, macro and CTA funds taking profits from rates and commodities rises, and crypto, activist, tech and energy managers also surging. But performances were also underpinned by a degree of broad dispersion: the top decile of the HFRI rose 16.3 per cent, while the bottom decile slumped 3.1 percent for the month. Kenneth Heinz, HFR president, said February’s numbers marked the strongest four-month period in more than 20 years. “Performance widened to include not only event driven and equity hedge, but also captured strong positive contributions from trend-following macro and interest rate-sensitive relative value arbitrage strategies,” Heinz said. Equity hedge fund strategies, which take long and short bets across a range of sectors and sub-strategies, are now up 6.35 per cent for the year, after the HFR’s Equity Hedge (Total) Index added 4.85 per cent in February. Within this sector, hedge fund managers targeting energy and basic materials led the way, posting a 9.35 per cent monthly rise aided by strong oil market gains last month. These strategies are now up 13.85 per cent year-to-date. Elsewhere, the fundamental value index spiked 6.44 per cent in February, fundamental growth rose 4.56 per cent, while technology-focused strategies grew 4.39 per cent. Other equity hedge fund sub-strategies – including market neutral, multi-strategy and healthcare-focused funds - edged into positive territory, with only quantitative directional managers, which dropped 0.46 per cent last month, in the red. Macro hedge funds - which trade on macroeconomic trends by trading interest rates, currencies, commodities, and equities, among other things – rose 3.64 per cent in February. The sector, as measured by HFR’s Macro (Total) Index, is up 3.81 per cent YTD. Among the best-performing macro hedge fund strategies last month were systematic diversified funds (4.45 per cent), commodities (4.06 per cent), and multi-strategy (3.15 per cent) funds. Event driven hedge funds – which include special situations, distressed, activist, and arbitrage strategies – spiked 3.59 per cent in February, driving year-to-date returns to almost 6 per cent. Here, activist hedge funds topped the table, growing 8.27 per cent last month, and are up 6.83 per cent since the start of 2021. Special situations managers advanced 4.11 per cent in February, and 7.29 per cent YTD. Credit arbitrage, distressed, and multi-strategy event driven hedge funds each grew more than 2 per cent for the month. Relative value hedge funds – tracked by the fixed income-based HFRI Relative Value (Total) Index – returned 2.32 per cent in February, to put their year-to-date performance up 3.53 per cent. All other sub-strategies were up, with yield alternatives-focused strategies rising 6.27 per cent, and convertible arbitrage, multi-strategy, and volatility funds each advancing more than 2 per cent.  Meanwhile, digital assets-focused hedge funds continued their advance last month, with the HFR Blockchain Composite Index and HFR Cryptocurrency Index each soaring some 30 per cent in February. “New stimulus measures, increasing vaccinations, and uncertainty with regards to immigration and energy policy have shifted macroeconomic and geopolitical volatility to include not only the single stock or asset trends from concentrated, increased retail trading but also cryptocurrency trading, energy exposure and interest rate and inflation sensitivity,” Heinz said. “Institutional investors are likely to continue expanding allocations to leading hedge fund managers as a mechanism to gain specialised exposure to these and other powerful trends through mid-2021.” Tags Results & performance Funds Surveys & research

  • DE Shaw’s latest paper is a cautionary tale on the efficacy of short duration US Treasuries
    by James.Williams on March 8, 2021 at 2:33 pm

    DE Shaw’s latest paper is a cautionary tale on the efficacy of short duration US Treasuries Submitted By James Williams | 08/03/2021 - 2:33pm Last month the fear of inflation in the US economy reared its head. Yields on 1-year US Treasury securities bounced higher from a low of 56 basis points on 19th February to 89 basis points by close of play on 25 February. For 2-year Treasuries, they went from 109 basis points to 168 basis points. As CNBC reported, the 5-year breakeven rate, an indicator of the bond market’s expectations for inflation, rose to 2.38 per cent last month, which at the time was its highest level since pre-GFC. At the time of writing, this has ticked up to 2.43 per cent. Yesterday, Federal Reserve chairman Jay Powell signalled that the US central banks would remain “patient” in response to a temporary rise in inflation. With the US economy in continued growth mode, introducing a rate hike too soon, while the US tries to reduce its unemployment numbers, might derail GDP growth. But if inflation creeps up and yields continue to show upward movement over the next couple of quarters, a rise in real interest rates is highly likely. Indeed, the FTSE fell 1 per cent overnight as investors interpreted Powell’s comments as such. Let’s face it, with US Treasury securities having fallen so sharply over the last 12 months in response to the pandemic, the risk to another negative market shock would leave bond investors with precious little capacity to hedge against equity risk. Any movement to the downside on bond prices will help push short-duration yields away from the lower bound of the federal funds rate of 0.25 per cent. A year ago, this was just over 1.5 per cent. In many respects, this needs to happen in order to reintroduce some much needed capacity at the shorter end of the yield curve. Why? Well having just read an interesting white paper by the DE Shaw Group, modelling the performance of US Treasury securities over the last 12 months has shown that, while bonds did indeed behave as expected in March and April 2020, when the US economy tanked, it was a very different affair for the rest of the year. The paper, entitled Running Low: The 2020 Test for Bonds as Hedging Assets, showed that between 14 February and 16 March, short-duration bonds (up to 5-year Treasuries) proved to be an effective equity hedge, with 2-year and 3-year Treasuries falling by 100 basis points on average. Even 10-year Treasury securities did well, with actual yields falling 86 basis points compared to the 55 basis points in DE Shaw’s modeling predictions, which used a sample set spanning 1 January 2004 to 3t December 2019. The correlation of 10-year Treasury yields to the S&P 500 is still quite high. But what DE Shaw’s research paper then goes on to show is just how limited US Treasury securities are, if there were to be another negative economic shock. Yields have fallen so much over the last year that unless one moves further out to 20- and 30-year bonds, one cannot hope to achieve any meaningful equity protection at the shorter end of the curve. To briefly illustrate, if the US stock market experienced a similar sized sell-off to that seen last March, 3-year Treasury yields would fall 11 basis points, compared to 48 basis points predicted by the model. It is a similar story for 5- through to 10-year US Treasuries. Only when you move to the far end of the yield curve do yields begin to show meaningful protection: 41 basis points compared to 52 basis points for 30-Year Treasuries. “One of the interesting results of the paper is that if the front end of the yield curve is constrained by the lower bound of the Fed funds target rate, then a viable solution is to move further out on the curve. Our results show that there is a favourable correlation as you move out to longer maturities,” comments Brian Sack, Director of Global Economics at the D. E. Shaw Group. Much of the rubber has already hit the road in US bonds to expect investors to find any meaningful hedging benefits, which is why the recent bond market jitters in response to inflation is actually a positive development. Sack is of the view that “longer duration treasuries are still able to respond to risk-off episodes and negative shocks in the way you would expect for a safe haven asset”. Aside from 10- and 30-year US Treasuries demonstrating a high correlation to the S&P 500, which has been notable since 2012 (when they crossed to a higher correlation than 2-year Treasuries) another reason to explain why longer-duration bonds provide more hedging capabilities is linked to implied volatility. In the research paper, DE Shaw shows that while a sharp decline in implied volatility (i.e. less expectation that prices will move) was seen in 2-year Treasuries when Covid-19 struck, it hardly changed for 10- and 30-year securities. So, the upshot to active managers is that in the current environment, unless inflation runs out of control and we see a significant rate hike, short-duration bonds offer precious little hedging capacity. The solution is to move further out on the yield curve. Is this a long-term structural trend at the shorter end of the US yield curve? Sack offers the following view: “I do think it is a new structural period in the sense that monetary policy is going to be constrained by the lower bound for meaningful periods of time. “We’ve put out research in the past (Floor It: Market Pricing of the Lower Bound on Interest Rates) saying that such a constrained condition could exist at least 20 per cent of the time, and the Fed has published its own research suggesting it could be a third of the time. In those situations, we would expect the hedging benefits of short-duration Treasuries to be impaired.”  Views on inflationary risk will always polarise opinion and 2021 is no different in that respect. It is likely that inflation exceeds the Fed’s 2 per cent target, but it’s unlikely they would allow a substantial upward shift as they look to bring unemployment levels down closer to somewhere in the 3 per cent range; it was 6.3 per cent end of January this year. Real interest rates will have to move up, to prevent the US economy overheating. Linking it back to DE Shaw’s research paper, Sack opines that if rates go higher, “then Treasuries will have more room to rally if there is another risk-off episode, supporting the safe haven status of those securities”. Concerns over a substantial increase in long-term inflation expectations, or a steepening of the yield curve based on the supply of longer duration Treasuries, could potentially reduce the hedging capabilities at the longer end of the yield curve. For now though, 10-year Treasuries offer plenty of capacity. Yields have risen to 159 basis points, compared to last July when they were at 60 basis points. As such, they still provide an effective hedge, were the US economy to be impacted over the near term. If the US bond market remains constrained, and affect the hedging abilities of short and intermediate term Treasuries, it could begin to resemble two other major bond markets: namely Germany and Japan. In that respect, DE Shaw’s research paper is a cautionary tale. “Germany and Japan show us that the situation in the United States could become worse. If some of the secular trends towards lower neutral policy rates were to continue, you could be in a situation where the reduced hedging capacity becomes a more chronic condition across the entire yield curve.  “That’s not our expectation for the United States, but it is interesting that such a scenario has ready happened in other major global bond markets,” concludes Sack. Author Profile James Williams Employee title Editor-in-Chief Twitter Tags Bonds Surveys & research

  • AI-driven hedge fund Quantumrock sees positive performance in February 2021
    by mkitchen on March 8, 2021 at 10:50 am

    AI-driven hedge fund Quantumrock sees positive performance in February 2021 Submitted 08/03/2021 - 10:50am Despite difficult market conditions, Quantumrock’s flagship strategy, Volatility Special Opportunities Program (VSOP), has closed February with +0.49 per cent. At the end of February, the 10-year Treasury yield surged above 1.5 per cent, exceeding the estimated dividend yield on the S&P 500 Index, which stood at about 1.43 per cent. The S&P 500 Index lost 2.5 per cent on one of its worst days so far in 2021 and caused a jump of more than 13 per cent in the VIX Index. One of our tail hedge strategies, "Equity Protect VIX", which monitors spikes in the VIX index, was able to catch this surge, hedging the portfolio's long equity and bond exposure highly effectively. The strategy contributed on that day with +2.2 per cent and compensated the losses in equity and bonds exposures. It has one more time demonstrated its remarkable capacity in providing downside protection and generating alpha in volatile markets. The portfolio closed the month with +0.49 per cent. Volatility strategies contributed with +1.61 per cent. Autocorrelation strategies on the S&P500 and US Treasuries contributed with -1.11 per cent. Michael Zeller, CIO of Quantumrock, says: “The drop in infections and the rapid vaccination rollout continued to drive markets higher in February. Equity markets closed the month with positive returns, despite a drop towards the end of the month. The rotation in favour of value and small caps continued as a result of the expected post pandemic normalisation and rising bond yields. The performance insights indicated in the graph above further reflect that our strategies’ tail hedging capabilities are performing well in these unpredictable market conditions.” Author Profile Tags Results & performance Funds

  • Varenne Capital Partners selects INDOS Financial & Clarus Risk Partnership for liquidity stress-testing solution
    by mkitchen on March 8, 2021 at 8:53 am

    Varenne Capital Partners selects INDOS Financial & Clarus Risk Partnership for liquidity stress-testing solution Submitted 08/03/2021 - 8:53am Varenne Capital Partners, a global alternative investment manager, has chosen to leverage a partnership between its depositary, INDOS Financial, and fintech risk firm Clarus Risk, to provide a fintech Liquidity Stress-Testing solution. Following new ESMA liquidity stress test guidelines which came into force on September 30th, 2020, this collaboration enables independent stress-testing and enhanced liquidity risk oversight while utilising connectivity now established between INDOS Financial and Clarus Risk to streamline the risk governance process. Under the new operating model, Clarus Risk will source fund asset and liability data from INDOS Financial to generate liquidity risk metrics via its RiskMonitor® Liquidity solution which incorporates analysis of investor behaviour as well as asset risk scenarios to provide a comprehensive asset and liability appraisal in a broad and investor friendly format.  David Mellul, Managing Director of Varenne, says: “Strong risk management and corporate governance are key pillars of our responsible investment policy and our chosen independent depositary and risk service providers are now able to reinforce our risk oversight and transparency through their collaboration and the provision of regular liquidity stress testing."    Bill Prew, CEO of INDOS Financial, adds: “The new ESMA liquidity stress testing guidelines came into effect at a challenging time for the funds industry due to the on-going impact of COVID-19 on operations and financial markets.  Through this partnership with Clarus Risk, INDOS is now able to facilitate independent liquidity stress testing for its clients in an efficient way, reducing their operational burden and enabling them to demonstrate compliance with the new requirements.”    Max Hilton, Managing Director of Clarus Risk, adds: “The ESMA guidelines are principal based which brings subjectivity and complexity to the implementation of an appropriate solution. This fits well with our RiskMonitor® platform which is designed to facilitate client and fund specific risk reporting that aligns with the risk tolerance and underlying asset mix of each fund. This partnership with INDOS brings new operational efficiencies to the benefit of our clients.”   Author Profile Tags Technology & software solutions

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