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Hedge Funds Fared Better Than Stock Indexes in February's Volatility

Hedge funds showed signs of strength during the market turmoil last month, according to HFR.

  • By Alicia McElhaney

Hedge fund managers finally got a taste of market volatility last month, faring better than major stock indexes despite suffering losses.

Data released Wednesday by Hedge Fund Research showed that hedge funds beat the MSCI World Index and the S&P 500 during February after the CBOE Volatility Index, or VIX, spiked. 

This is good news for hedge funds, which have been struggling to keep up with a particularly heady bull market over the past year. Volatility had been low in 2017 and early this year before the VIX spiked 116 percent on February 5, according to a Credit Suisse Group report.

More volatility in the market leaves room for hedge funds to outperform, as managers are able to take advantage of more dispersion, or the difference between positively and negatively performing assets, in the market. 

"Hedge funds declined in February for the first time since October 2016, as long latent global equity market volatility soared and U.S. interest rates increased, with certain hedge fund sub-strategies posting impressive, negatively-correlated gains through the volatility spike," Kenneth Heinz, president of HFR, said in Wednesday's statement. 

 [II Deep Dive: Why Hedge Funds Will Flourish as Volatility Increases]

During February, hedge funds in the HFRI Fund Weighted Composite Index declined 1.8 percent, while the S&P 500 declined 3.8 percent. The MSCI World Index, which measures the performance of large and mid-sized companies in developed markets, saw a slightly bigger drop of 4.3 percent last month.

Though the HFRI Fund Weighted Composite Index posted a loss in February, Heinz sees reason to remain positive about 2018.

"Despite the decline, the thematic drivers of hedge fund performance have not changed and, in fact, may actually have accelerated throughout the month," he said in the statement. Heinz pointed to U.S. inflation, interest rates and trade negotiations as drivers of industry performance this year, creating both long and short opportunities for hedge funds.

A few of the industry's sub-categories posted gains last month.

For example, the HFRI Equity Hedge Technology Index returned 0.43 percent in February for a 4.79 percent gain this year. The HFRI Relative Value Fixed Income Asset-Backed Index returned 0.87 percent last month, bringing 2018 gains to 2.06 percent.

Meanwhile, the broad HFRI Fund Weighted Composite Index has gained 0.5 percent this year through February. By comparison, the S&P 500 returned 0.67 percent between January 2 and February 28.


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