Some Hedge Funds Almost Breached Contracts in March – But Then Stocks Bounced Back

March was disastrous for many hedge funds — including some that reported dangerously steep declines in net asset values.

This is according to a recent survey by investment consulting firm NEPC, which found that some hedge fund managers were “close to setting off NAV triggers” — the maximum amount of decline in net-asset value allowed in trading agreements between hedge funds and their counterparties. As NEPC explained, “If the net asset value falls by a certain percentage within a month or quarter, the counterparty can terminate the trading relationship at the expense of the fund.”

These hedge fund managers told NEPC that they approached their NAV triggers during March’s equity sell-off. Fortunately for them, “the subsequent rebound later that month helped give fund managers some breathing room,” the consulting firm said.

According to Preqin, hedge funds as a whole lost money in March, though generally not as much as stock indexes like the Standard & Poor’s 500, which fell by more than 12 percent.

The data firm’s all-strategies hedge fund index fell 8.96 percent for the month, as nearly every hedge fund strategy suffered losses. Equity hedge funds and event-driven funds were among the worst hit, with Preqin reporting a decline of 11.71 percent for equity strategies and a 14.69 percent loss for event-driven strategies.

Some hedge fund managers, according to NEPC, had trouble finding liquidity in March, particularly in the fixed-income markets.

“Credit-focused hedge funds described significant disruptions in their markets, and challenges in trading and obtaining financing through repurchase agreements with counterparties,” the consulting firm said. “On the other hand, long-short equity funds did not report any issues with liquidity or prime-brokerage financing.”

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The findings were based on a survey of 53 hedge fund managers that NEPC recommends to its client base of institutional asset allocators. Other questions addressed how hedge funds have adapted their operations to the economic shutdown and social distancing requirements brought on by the coronavirus pandemic.

“Investors are especially worried about the disruption in services that hedge funds typically rely on for certain middle- and back-office functions, for instance, accounting, auditing, and information technology,” NEPC said.

Despite these concerns, the surveyed managers said they were adjusting just fine. None reported having any issues with employees transitioning to remote work, and there were also no reports of service disruptions from administrators, auditors, prime brokers, and data and IT providers.

“Many respondents reported that they had moved fully to working from home,” NEPC said. “No respondent stated having any issues with this arrangement; many noticed an uptick in communication between employees and teams. Additionally, no fund manager conveyed any change in operational processes due to this new normal.”