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Hedge Funds’ Biggest Losers in August: Emerging Markets, Activist Strategies

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The big drop in global equities markets in August took a heavy toll on hedge funds, according data released this week by Hedge Fund Research.

The HFRI Fund Weighted Composite Index experienced its biggest drop since May 2012, falling 1.9% for the month and paring the index’s year-to-date return to 0.2%.

Only some 31% of all hedge funds reported gains in August, while the top quartile of all hedge funds posted an average gain of 2.8%.

“After falling for several months, macroeconomic volatility and uncertainty increased sharply as a result of slowing growth in China and the first and second order impacts this has on global equity, currency, commodity and fixed income markets,” HFR president Kenneth Heinz said in a statement.

“August hedge fund performance displayed a wide range of performance dispersion, including differentiation between strategies, sub-strategies, regions, high and low beta exposures, as well as between individual funds, maintaining a small year-to-date gain for the HFRI.”

Despite the August loss, the HFRI index outpaced the S&P 500, which was down 6%, by more than 400 basis points. This followed several years in which the benchmark trailed strong equity market gains.

Heinz said the HFRI outperformance of equity benchmarks through August expanded to the widest level since 2008 as a result of conservative positioning and opportunistic trading.

“This outperformance is likely to continue in coming months, concurrent with volatility trends and across top performing, opportunistically positioned hedge fund strategies,” he said.

Hedge fund performance declines in August fell across a wide swath of primary strategies.

The HFRI Equity Hedge Index experienced a decline of 2.6% for August, and is now up just seven basis points for the year. Short bias funds led sub-strategy performance, gaining 5%, while high beta growth strategies brought up the rear after falling 4.1%.

Driven by losses across emerging Asia, the HFRI Emerging Markets Index posted a loss of 4.5% in August. The China sub-index plummeted 7.6%, bringing its recent performance drawdown to 18.5% since June. Still, the sub-index maintains a small gain of 0.3% as a result of strong early year gains.

The HFRI Macro Index fell by 1.2%, with mixed declines in constituent sub-strategy areas as volatility spiked across equity, commodity, currency, emerging markets and fixed income assets.

Fixed-income-based relative value arbitrage strategies recorded losses across credit multi-strategies, with the HFRI Relative Value Index falling by 1.3% for the month. The weakest area of relative value sub-strategy performance was the Yield Alternatives Index, which lost 2.1%, bringing its decline for the year to 4.6%.

Event-driven strategies fell by 1.7%, as many deal spreads widened, with losses in high beta strategies only partially offset by market neutral exposures. Shareholder activist funds were the weakest area of event-driven performance, with the sub-index declining by 3.5%.

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