Hedge fund investors might be having wildly different performance experiences.
Take managed futures funds, for example, which have turned in monthly performance numbers that haven’t been this good since 2003. In fact, if 2022 were to end in March, the category’s 9.7 percent return would be its best calendar year since 2014. On the other end of the performance spectrum, the equity sector index returned – 7.6 percent for the first three months of the year. If 2022 ended now, equity sector funds would have had their worst calendar year since 2008.
It all depends on the weights investors have given to macro, managed futures, and equity sector strategies in their portfolios. Year-to-date performance standouts among PivotalPath’s 45 sub-indices are global macro commodities, which delivered 12.6 percent, and global macro discretionary, which generated 10.3 percent.
The same gap applies to alpha, generally defined as returns not explained by a given benchmark. “You have some strategies that, relative to the S&P, are [performing better than they have] in many years, and some strategies that are among the worst,” said Jon Caplis, CEO of hedge fund research firm PivotalPath.
Managed futures have generated 12 percent in alpha relative to the S&P 500 over the last 12 months, the highest since September 2015. But things haven’t been as rosy for equity sector funds, which are mostly driven by health care, telecommunications, media, and technology stocks. These funds have generated -15 percent in alpha over the last 12 months, the worst rolling one-year performance since July 1999.
Caplis said that to understand the big picture of hedge fund performance and alpha, it’s important to think about the role of dispersion, which occurs when asset classes behave differently from one another. Hedge fund managers, like all active investors, need some level of dispersion in order to outperform peers. If everything is moving in tandem, managers’ returns will also look similar.
Since 1998, during periods of low dispersion — around 2.6 percent — the annualized performance of hedge funds has been 9.8 percent. When dispersion has been high, around 6.2 percent, hedge funds have delivered 12.9 percent annualized. That’s a 3 percent gap. Caplis emphasized that beyond a certain level of dispersion, however, it’s difficult for hedge funds to do well. These environments are generally marked by extreme volatility, rather than lots of different moves among asset classes. In March 2020, dispersion was 12 percent, the highest such figure since 1998.
“What you want as an investor is a healthy level of dispersion,” said Caplis. “It sets the stage for managers to outperform.”
For more than a year, dispersion has been slightly elevated, at around 4 percent each month. In March, the PivotalPath Composite Index’s dispersion was at 5.1 percent, roughly double the 10-year historical average. But Caplis said that that’s still a healthy level.
Caplis added that the dispersion at the fund level across all strategies has been only slightly elevated on a monthly basis. But looking back over 12 months, the cumulative dispersion has created the extreme performance differential between strategies such as managed futures and equity sector.