Hedge Funds Defy Major Indices With Record Outperformance Last Month

September was a mirror image of August, with Covid and inflation driving the markets.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Hedge funds protected investors in September, even as traditional investments suffered in last month’s declining markets.

Almost every global equity market index lost ground in September. But PivotalPath’s composite index, which represents more than 40 hedge fund strategies, was up 0.1 percent for the month.

That puts September’s outperformance of 4.7 percent, relative to the S&P 500’s decline of 4.6 percent, in the top 10 percent of all months since January 1998, according to the hedge fund research and data firm. Hedge funds also held their own as the Nasdaq declined 5.3 percent and the health care and technology sectors lost approximately 6 percent.

Hedge funds have been on a good run. PivotalPath’s composite index, which includes all of the hedge fund strategies the firm tracks, was up 11.3 percent in 2020, its best year since 2013.

Traditional long-only strategies were hit hard by fears of inflation, rising energy prices, and supply chain hiccups.

“But as worries about inflation became frenzied, energy, utilities and industrials hedge fund strategies were the second-best performer for the month, exactly as predicted,” Jon Caplis, CEO of PivotalPath, told Institutional Investor. The energy, utilities, and industrials category was up 1.8 percent last month and was the fifth best performer of all 40 strategies covered by the firm.

In September, energy hedge fund strategies were up 3.5 percent, with global macro discretionary up 2.2 percent, according to the firm. One of PivotalPath’s subindices, Global Macro: Commodities, was up 8 percent.

Caplis said that the outperformance also comes from the value investing tilt of many hedge fund managers. Value stocks significantly outperformed growth in September. “Most people don’t think of hedge fund managers [as] being value investors,” said Caplis. “But the economy and value are rising at the same time. It is setting us up for a good environment for energy in general. With increased demand, you have prices rising for crude, and then there is a value play.” If inflation comes back, Caplis added, “energy typically outperforms technology because cyclicals and value outperform growth.”

Caplis said that September was a complete reversal of what happened in the markets in August. “When you see reversals like that, it’s not based on fundamentals. That’s typically a sign of a macro-driven market. In this case, Covid and inflation are the stories.”

In line with the value-growth story, PivotalPath’s Social Distance Losers have also come roaring back, both last month and year-to-date. Social Distance Losers, which include travel and hospitality companies like Marriott and Delta, returned 3.6 percent in September, compared to a loss of 3.1 percent for Social Distance Winners. Winners include technology companies like Zoom, which benefited from remote work. Losers returned 19.6 percent year-to-date, compared to just 6 percent for the Winners.