March Hedge Fund Insights by PivotalPath

Summary

• The PivotalPath Composite Index returned 0.1% in February amid declining equity markets.
• The S&P 500 declined 2.4% and the Nasdaq and Russell 2000 fell -1.1% and -1.8%, respectively. The whipsaw and volatility continues from 2022 as the S&P 500 and most other major markets were negative after rallying in January.
• Meanwhile, the PivotalPath Composite Index has generated modest positive performance in 10 out of the last 14 months.

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 February.

Strategy Highlights

With the exception of Managed Futures, all hedge fund strategies were positive in January. The Equity Sector Index and Equity Diversified Index performed best in January, reversing their bottom of the pack performance in 2022.

Alpha Generation

For the 12-month rolling period ending in February, Managed Futures and Global Macro continued to produce the highest alpha while Equity Sector remained at the bottom. All strategies generated positive alpha except Equity Sector and Event Driven.

The chart below depicts alpha generation for each PivotalPath Index, ranked from high to low. Each strategy is color-coded for easy tracking.

Performance

As illustrated in the graph below, larger funds outperformed smaller funds due to the concentration of large Managed Futures and Multi-Strategy funds. Dispersion, as measured by the spread between the 75th percentile returns and 25th percentile returns, declined in February versus January. All AUM bands are positive YTD.

Pivotal Context

The Hedge Fund Takeaway

The PivotalPath Composite Index rose modestly (+0.1%) in February adding to positive performance in January. YTD, the PivotalPath Composite Index is +2.3% vs. the S&P 500 up 3.7% and Nasdaq up 9.5%. The Composite’s volatility, however, remains historically low vs. the S&P 500 over the last 12 months through February. The S&P 500 Index generated volatility of 23.8% vs. 3.8% for the Composite, or 6.3x the volatility. For context, the volatility ratio of 6.3 is in the 98th percentile of rolling 12-month periods going back to 1998.

Hedge Funds broadly fared well. 52% of all funds reporting were positive in February. YTD, all strategies are positive with Equity Sector and Event Driven leading the pack at +3.3% and +2.6%, respectively.

Managed Futures posted gains (+1.8%) as yields backed up and the strategy is now positive on the year. While the Equity Sector Index gave back 0.9% in February, YTD it remains up 3.3% driven by Consumer/Retail, TMT, and Financials (prior to SVB and the fallout in March).

The Macro Backdrop

After positive global equity performance in January, most major indices declined across most of Asia and the U.S. with Hong Kong’s Hang Seng (-11.4%) leading the way lower and the S&P 500 (-2.4%), Russell 2000 (-1.8%) and DJIA (-4.2%) all falling. Europe was a bright spot globally with Euro Stoxx 50 (+1.8%) and FTSE 100 (+1.8%) as well as Japan with Topix (+1.0%) and the Nikkei 225 (+0.5%).

Within US equity, all sectors we monitor declined except for technology (XLK) which saw a modest increase of 0.4%. Notable declines during the month include Biotech (IBB) -6.9%, Energy (XLE) -6.9% as nat gas touched a 2020 low before rebounding, Real Estate (XLRE) – 5.9% and Healthcare (XLV) -4.6%.

Treasuries: The US 10-year Treasury yield rose 12% to 3.92% while the 2 year rose 15% to 4.82%, further inverting the yield curve and continuing to signal a recession.

Volatility as measured by the VIX rose 6.7% to 20.7. Stay tuned for future Pivotal Research which will analyze equity and hedge fund strategy performance in different volatility regimes.

Dispersion

PivotalPath’s proprietary Dispersion Indicator came down once again in February and YTD is only slightly above its monthly average dating back to January of 2008 after being well above average since 2020.

Larger funds outperformed smaller ones in February due to Trend following and Multi Strat strategies.

Factors

All factors (represented by the Dow Jones U.S. Thematic Market Neutral factors) except for the value factor were up in February.

Value lost 2.1% on the heels of losing 67 bps in January, after gaining 24% in 2022, the largest gain since 2002. Ø Momentum was the best performing factor in February (+3.1%) after being the worst performing in January (-11.7%).

The low beta factor also reversed course from January and returned 1.3% in February.

The size factor is the only positive factor YTD (+4.4%).

Leverage

The Equity Diversified U.S. Long/Short Fundamental Index has a beta of 0.4 to the S&P 500 in the last 12 months through February. This is slightly off the lows in May 2022 of 0.35, indicating that long/short funds in are somewhat less bearish on equities, but still below the levels seen in 2019-2021 when exposure averaged over 0.5.

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.

Jon Caplis serves as PivotalPath’s CEO, responsible for setting the firm’s strategy and overseeing all aspects of the firm’s operations. Mr. Caplis also serves on PivotalPath’s board. In his 10 years of direct hedge fund experience, Mr. Caplis served as co-head of portfolio allocation and risk management at Campbell & Co., a multi-billion dollar systematic hedge fund.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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