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Did Hedge Funds Help Investors Survive March?

Hedge funds fared better than the broad market while their dispersion of net returns hit a record, according to PivotalPath.

Hedge funds helped soften the blow of the March market meltdown — but investors couldn’t entirely escape the carnage.

PivotalPath Hedge Fund Composite Index, an index representing over $2 trillion of assets, fell 5.1 percent last month, compared to the 12.4 percent decline of the Standard & Poor’s 500 stock index. At the same time, dispersion of returns for the funds in PivotalPath’s index hit a record, meaning individual hedge fund strategies behaved very differently from each other.

PivotalPath tracks 2,000 funds and more than 40 strategies. The firm’s Composite Dispersion Indicator, which measures the dispersion of net returns across all funds in the composite index, was a record 11.2 percent (the higher the value, the more dispersion) in March. According to PivotalPath, that’s the highest value since the firm started tracking dispersion in January 2000, and it’s four times the 2.9 percent average of the previous 12 months.

The research firm said the high volatility in March and the unprecedented dispersion may create larger-than-normal revisions to PivotalPath’s indices in the coming weeks, particularly in credit.  

Some of the worst performing categories were equity diversified and event-driven funds. Equity diversified funds suffered a 6.5 percent loss in March and a 9.4 percent loss for the quarter; Event-driven funds lost 8.2 percent and 9.9 percent, respectively.

Energy, distressed credit, and mortgage-backed credit funds were also among the worst-performing.

On the positive side, global macro funds lost only 2.4 percent in March, while losing 3.2 percent for the quarter. 

Managed futures funds, designed to do well when equity markets fall, lost investors only 0.2 percent in March. Multi-strategy funds lost 4 percent for the month, and 3.2 percent year-to-date. 

The size of hedge fund firms also influenced performance. Firms with more than $10 billion in assets generated a negative 5.7 percent average return in March, while those with assets between $5 billion and $10 billion delivered an average negative 5.5 percent. Hedge fund firms with between $2.5 and $5 billion in assets generated an average negative 3 percent return, similar to firms with $500 million or less in assets.

Hedge fund firms with assets between $1 billion and $2.5 billion generated the worst average return (-8.3 percent) for the month.

“Overall, hedge funds that trade volatility benefited from the sharp spike in volatility, especially those with a long-vol bias. Specifically, multi-PM firms held up well because of diversification and tight risk management while discretionary macro funds that did well generally had long dollar, long volatility, short equities and/or short oil bets in their portfolios,” according to PivotalPath. 

Still, the business of hedge funds appears healthy. “Given the dislocation, a number of closed managers recently re-opened to new capital. Also, we see high-quality launches still going forward, including those with April 1 launch dates,” said the hedge fund research firm.

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