Commodities | Equities | FX
Are Hedge Funds Actually Beating the Market?
- By Jon Caplis
- 6 min read
Summary
- Hedge funds performed well in 2022 against a backdrop of volatile and declining equity markets.
- In December, the PivotalPath Hedge Fund Composite Index rose 0.4% versus the S&P 500’s decline of 5.6%.
- For the year, the PivotalPath Hedge Fund Composite Index lost 0.8% compared to the S&P 500 which fell 18.1%. The Nasdaq declined 6.0% in December and was down 33% for the year.
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Summary
- Hedge funds performed well in 2022 against a backdrop of volatile and declining equity markets.
- In December, the PivotalPath Hedge Fund Composite Index rose 0.4% versus the S&P 500’s decline of 5.6%.
- For the year, the PivotalPath Hedge Fund Composite Index lost 0.8% compared to the S&P 500 which fell 18.1%. The Nasdaq declined 6.0% in December and was down 33% for the year.
Introduction: The Pivotal Point of View
Every year, more than $4tn of global hedge fund capital is benchmarked against inaccurate indices. At PivotalPath, we are addressing this discrepancy and providing unparalleled clarity for institutional investors. We do this by analyzing over 2,500 institutionally relevant hedge funds, which span over $2.5tn of industry assets, to accurately represent and understand hedge fund performance.
Our signature report where we share our findings is the Pivotal Point of View – a monthly newsletter that contextualizes these data points and synthesizes them with perspectives from hedge fund managers and institutional investors bringing you important context and insights you can trust.
Below are our most recent findings for December.
Strategy Highlights
With the exception of Equity Diversified, all hedge fund strategies were positive in December. The Multi-Strategy Index performed the best in December (+1.6%). For YTD 2022, Managed Futures and Global Macro continued to top the charts, generating positive performance in 8 of the 12 months of the year.
Alpha Generation
For the 12-month rolling period ending in December, Managed Futures and Global Macro continued to produce the highest alpha while Equity Sector remained at the bottom. The PivotalPath Composite returned to generating positive alpha as did Multi-Strategy.
The chart below depicts alpha generation for each PivotalPath Index, ranked from high to low. Each strategy is colour-coded for easy tracking.
Size and Strategy
As illustrated in the graph below, monthly volatility was high throughout the year across equity markets, while the PivotalPath Composite remained unusually steady. While dispersion has come in during Q4, it remains historically elevated across most strategies.
Pivotal Context
The Hedge Fund Takeaway
The PivotalPath Composite Index appreciated 0.4% in December and is down 0.8% for the year.
The Composite’s (cumulative) spread above the S&P 500 rose significantly in December and is 18.6% for the year which is the largest outperformance since 2008.
The smooth ride continues: In addition to the 2022 outperformance vs. the S&P 500, the PivotalPath Composite has maintained a volatility of 3.5% vs. volatility of 23.5% exhibited by the S&P 500 over the last 12 months. The Composite has maintained volatility below its 25-year average during a time when the S&P 500’s volatility is more than 50% above its 25-year average.
Once again, the month-to-month seesaw continued. After positive equity market performance in November, December declined significantly with the S&P up 5.6% then down 5.8%, while the PivotalPath Composite Index was up 0.8% in November and up 0.4% in December.
The three strongest sub-sector indices in 2022 were all within Global Macro: Quant +15.9%, Multi-manager +13.1%, and Commodities +12.9%.
The weakest sub-sector indices in 2022 were all Equity related: TMT -21.4%, European Activist -21.2%, Consumer/Retail -12%, Equity Special Situations -11%, and lastly, US Activist -8.7%.
The Macro Backdrop
As mentioned above, December gave back gains from October and November, ending the year without any holiday rally. Inflation, recession concerns and a covid-driven slowdown in China along with remaining supply chain issues all contributed to the weak performance.
Global equitymarkets saw weak performance in December with all global markets we track negative except for China’s CSI 300 and Hang Seng.
From an Equity Sector perspective, all sector SPDR indices we track were also negative in December. Consumer Discretionary (XLY) was down 11.6% for the month and 36.8% for the year. This is followed by Communications (XLC) -6.8% and -38%, Technology (XLK) -8.4% and -28%, and Real Estate (XLRE) -5.9% and -29%.
Bonds and commodities: The US 10-year Treasury yield rose to 3.87% and the 2 year rose to 4.43% with the inverted yield curve flattening slightly from 70bps to 56bps. The Dow Jones Commodity Index was flat for the month while natural gas futures fell 35%. Both are up approximately 20% for the year.
Volatility as measured by the VIX rose 5 points to 25.4%.
Dispersion
Dispersion of hedge fund performance remains the highest since the 2008-2009 Financial Crisis. The PivotalPath Composite Index dispersion between the 75th percentile and the 25th percentile was 20.1% compared to a ten-year average of 12.3%.
Dispersion is historically high in almost all indices but led by Equity Diversified at 20.6%, followed by Equity Sector at 18.7%.
Factors
The best performing factor in December was the low beta factor, up 4.6%, followed by momentum, which was up 2.9% for the month.
The value factor was the top performer in 2022, up 24.3% for the year.
The size factor was the laggard, but still positive, in both December (+30bp) and YTD (+1.8%).
All PivotalPath Baskets were negative for the year except for the PivotalPath U.S. Cyclical Sectors Basket which was up 1.8% in December and +3.6% for the year, driven by energy and value-oriented companies.
Leverage
The leverage of US Equity long/short funds continues to be at the lower end of its historical range though off historic lows.
The Equity Diversified U.S. Long/Short Fundamental Index has a beta of 0.39 to the S&P 500 in the last 12 months through December, off the May lows of 0.35, indicating that long/short funds in general have become slightly less bearish on equities, consistent with our numerous conversations with portfolio managers.
About PivotalPath
PivotalPath is a trusted hedge fund industry expert. Harnessing its hedge fund research and analytics platform, PivotalPath consults exclusively with institutional investors whose hedge fund investments comprise over $250bn. By using PivotalPath, clients can leverage the industry’s most comprehensive set of hedge fund data, accurate indices, and robust analytics to evaluate, benchmark and monitor their hedge funds. We have built significant trust and lasting relationships with hedge funds through transparency and by ensuring that allocators evaluate each manager in the right context. PivotalPath protects confidential manager information and only shares insights with its institutional investor clients.