Hedge funds finally outperformed the broader market last month. The Eurekahedge Hedge Fund Index gained 0.37% in January, compared to the MSCI ACWI’s 0.11% gain for the month. Retail investors negatively impacted equities, sending certain stocks like GameStop GME GME GME GME and AMC through the roof and forcing hedge funds to sell other positions to cover their shorts of those names.
However, while retail investors aimed to hurt hedge funds, the volatility they created enabled the broader industry to outperform the global stock market.
A rollercoaster ride for stocks in January
Eurekahedge noted that gains in the early part of the month and in December were erased due to the turbulence caused by retail investors toward the end of the month. In the U.S., equities received a boost from President Joe Biden’s inauguration and Democrats’ taking control of the Senate early in the month.
Investors were also optimistic about the prospect of additional stimulus and the changing foreign policy of the new administration. However, risk sentiment changed quickly as retail investors clashed with hedge funds over GameStop and other heavily shorted stocks.
One hedge fund that bet against GameStop lost more than half of its assets under management due to a short squeeze on the stock. Of note, Melvin Capital required an infusion of cash due to its sizable short of GameStop. While funds like Melvin lost out, many fund managers were able to use the volatility to eke out small gains; this was true even as Dow Jones Industrial Average the S&P 500 and most European equities declined during the month.
A positive month for hedge funds
Hedge funds have had trouble beating their benchmarks for years, so January’s outperformance marks a significant change of pace for the industry. According to Eurekahedge, returns across geographic mandates were mixed last month. Funds in Asia excluding Japan led the way with a 2.09% gain, while North American funds were up 0.79%.
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More than half of the Eurekahedge Hedge Fund Index’s constituents posted positive returns last month, and 57.4% of managers outperformed the global equity market based on the MSCI ACWI. January’s outperformance marks a continuation of strong performance from hedge funds.
Global hedge funds gained 12.11% in 2020, marking their strongest full-year return since 2009. About 40% of the managers in the Eurekahedge Hedge Fund Index reported a double-digit return for 2020. On an asset-weighted basis, hedge funds were down 0.41% in January, demonstrating the challenges faced by larger managers.
Distressed debt and event-driven funds led the way
Across strategies, Eurekahedge found that returns were positive across multiple strategies. Distressed debt was the best-performing strategy with a 1.12% return, followed by event-driven funds with a 1.01% return. Distressed debt funds received support from the strong performance of high-yield bonds.
Meanwhile, long volatility and tail risk managers had weak performances in January. The former declined 0.54%, while the latter was down 0.18%. Long/ short equities hedge funds were up 0.77% for January.
So far so good, but will 2021 be a positive year for hedge funds? Stay tuned for the answer to that.