August was a challenging month for hedge funds, with the funds administered by one firm recording their first negative month of the year. Meanwhile, the funds tracked by another firm came out marginally positive for the month as the solid returns from four strategies offset the losses from the other strategies.
First monthly loss for Citco funds, PivotalPath funds nearly flat
Hedge funds administered by Citco generated an overall weighted-average loss of 0.8% for August, which reduced their year-to-date gain to 8.8% from 9.6% at the end of July. Fund returns were widely mixed by strategy, similar to what PivotalPath observed in its overall returns.
The PivotalPath Composite Index gained 0.3% in August amid uncertainties about China’s economy and U.S. inflation, which all weighed on equities. Year to date, the composite index is up 4.6%. For comparison, the S&P 500 and Nasdaq Index reversed their gains in July, falling 1.6% and 2.2%, respectively, in August. Year to date, the indices are up 18.7% and 34.1%, respectively.
Only half of the funds administered by Citco eked out a positive return for August, although over 75% of the funds were positive in July. Additionally, the rate-of-return spread, which indicates the difference between the funds in the 90th and 10th percentiles, widened to 7.3% from 6.7% in July, indicating a small month-over-month increase in volatility.
Meanwhile, 56% of the funds tracked by PivotalPath recorded positive August performances with an average return of 1.9%. On the other hand, 44% of those funds notched an average decline of 2.5% last month. For the first eight months of 2023, 77% of the funds tracked by the firm are in the green, averaging a return of 9.3%, while 23% are in the red, with an average decline of 6.3%.
Returns for Citco-administered funds widely mixed by strategy
The overall median return for funds administered by Citco was flat for August, indicating worst performances among the largest funds.
Equities funds administered by the firm recorded weighted-average losses of 1%, their first monthly decline this year, and a median loss of 0.3%. Multi-strategy funds also recorded a decline of 1%, although they were flat on a median basis.
However, commodities funds reversed the previous month’s gains to record a weighted-average loss of 1.9% for August, making commodities the worst-performing strategy among Citco-administered funds last month. Commodities funds recorded a median loss of 0.3%.
On the other hand, global macro was the best-performing strategy with a weighted-average return of 0.8%, although the strategy was flat on a median basis. Fixed income arbitrage came in at 0.7% on both a weighted-average and median basis, followed by event-driven at 0.5% on a weighted-average basis with a median return of 0.2%.
PivotalPath observed a similar mix of returns by strategy
Like Citco, PivotalPath also saw mixed returns by strategy in August. Equity quant funds were the firm’s best performers with a return of 2.4%, followed by multi-strategy funds at 1.2%, credit funds at 0.9%, and event-driven funds at 0.8%. Global macro was up 0.5%.
PivotalPath’s worst-performing strategy in August was a three-way tie between equity diversified, equity sector and volatility trading, all of which declined 0.5%. All other strategies were in the green for the month.
Year to date, all the strategies are in the green except volatility trading, which is off by 0.7%. The best-performing strategies year to date are equity sector at 8.1%, equity diversified at 6.5%, and credit at 5.6%. Other strategies that have thus far put up solid year-to-date performances include equity quant at 4.9%, event-driven at 4.7%, and multi-strategy at 3.8%.
Performance by size
The largest Citco-administered funds with over $3 billion in assets under administration notched the worst performance in August, with a weighted-average decline of 1%. Funds with $1 billion to $3 billion were the second-worst performers, down 0.7% overall, although they declined only 0.1% on a median basis.
The only size group that didn’t decline overall contained funds with $200 million to $500 million, which were flat on both a weighted-average and median basis for August. Funds with less than $200 million were flat on a median basis but generated a weighted-average loss of 0.6%.
Citco-administered funds with $500 million to $1 billion were up 0.3% on a median basis, making them the best median performers, although they declined 0.6% on a weighted-average basis.
For PivotalPath, the picture was essentially reversed. The three largest size categories were in the green for August, with funds managing $500 million to $1 billion leading the way with an average return of 0.38%. The firm noted that this size group is heavily concentrated in global equity long/ short funds.
On the other hand, the three smallest size groups were in the red for last month, with funds managing $250 million to $500 million generating the worst average performance at -0.42%.
Year to date, PivotalPath funds with less than $100 million are the best performers with an average return of 7.36%, followed by funds with $1 billion to $2.5 billion at 6.76% and funds with $100 million to $250 million at 5.58%. All size groups tracked by the firm are averaging returns well in the green year to date.
Capital flows among Citco-administered funds
Despite the difficulties in August, redemptions plunged, flipping investor flows back into the positive. Analysts at the firm observed $6 billion in subscriptions and $5.2 billion in redemptions for a total net inflow of $800 million. The firm added that subscriptions were similar to July’s total, but redemptions plummeted from $9 billion in July.
Hybrid funds captured the lion’s share of the subscriptions, at $2.2 billion, which was much higher than the $400 million in redemptions they saw, resulting in $1.8 billion in net inflows. Funds of funds recorded net inflows of $200 million, followed by arbitrage and global macro funds, with $100 million in net inflows apiece.
On the other hand, some strategies recorded net outflows for August, with multi-strategy losing the most capital at $800 million in net outflows. Equities and event-driven funds recorded net outflows of $500 million and $100 million, respectively. Capital activity in emerging market funds was exceptionally low in August, leading to flat investor flows.
In terms of assets under administration, the largest funds with over $10 billion again recorded the largest net outflows at $1.3 billion. Funds with $1 billion to $5 billion under administration saw net outflows of $300 million. On the other hand, the smallest funds with less than $1 billion under administration recorded the most net inflows at $1.6 billion. Funds with $5 billion to $10 billion saw $800 million in net inflows.
Looking ahead, Citco observed $800 million in subscriptions and $15.7 billion in redemptions slated for September, resulting in net outflows of $14.8 billion scheduled for this month. Beyond September, the firm saw $100 million in subscriptions and $15 billion in redemptions scheduled, resulting in $14.9 billion in future net outflows.
The firm saw funds with over $10 billion slated for the most redemptions by far in September and beyond, followed by funds with $5 billion to $10 billion in assets.
Takeaways from August
PivotalPath reported that even with the S&P 500’s 15.9% rally over the last 12 months, its Composite Index has still generated alpha of 2.9% versus it. The Composite Index’s beta to the S&P is holding steady at 0.12, the lowest level recorded since April 2004.
The overall backdrop for hedge funds in August centered around China, inflation and predictions about the Federal Reserve’s next move as inflation persists. PivotalPath noted that the global economic focus shifted to China’s impact on the global economy and inflation data, with the Fed’s September rate decision on ongoing posture remaining in focus.
The firm added that the market reaction to all these uncertainties was “definitively risk-off,” with the S&P 500 falling 1.6%, the Nasdaq down 2.2%, the Dow Jones Industrial Average slipping 2.36%, and the Russell 2000 tumbling 5.17%. However, all of these indices remain in the green year to date, with a sizable spread between them ranging from the Nasdaq’s 34.09% rally and the Dow Jones’ 4.75% gain.
Meanwhile, the yield on the U.S. 10-year Treasury rose from 3.97% to 4.11% in August, while the two-year yield fell two basis points to 4.86%. PivotalPath noted that interest-rate-sensitive sectors are struggling amid renewed fears of another rate increase. Utilities tumbled 6.1% in August, bringing its year-to-date decline to 10.7%