Despite last week’s dramatic pension-fund rebalancing, which salvaged December from being the worst month since the Great Depression, hedge funds are still looking at a dismal performance for both the month and the year. As Deutsche Bank notes, long/short equity Hedge Funds are on track for worst month since 2011, with equity hedged strategies down -5% MTD, on track for the worst monthly performance since August 2011.
The ongoing rout has forced hedge fund managers to hunker down, resulting in multi-year low gross leverage even as net exposure has been relatively stable as the market sold off.
Last week we showed a detailed breakdown of the best and worst performing hedge funds according to HSBC, with Odey proudly leading the pack, while a variety of systematic hedge funds (and Greenlight) on the tailing end.
We also showed the performance of some of the most recognizable hedge fund names. It is clear that almost none of the “hedge” funds was hedged for the events that took place in Q4.
Meanwhile, the recent surge in volatility both – implied and realized – has spooked the other major marginal investor, systematic funds, who have officially thrown in the towel on 2018. VIX spiked above 35, and 1M realized volatility is now above 30, with the resulting jump in realized volatility triggering additional selling by vol control funds.
According to Deutsche Bank, vol control funds sold an additional $25bn in equities on the volatility spike. The higher volatility also prompted risk parity funds to further trim equity allocations, which is approaching 5 year lows.
Meanwhile, as we noted last week, CTAs remain net short S&P 500, which however prompts risks of a short squeeze.
Not surprisingly, the market turmoil led to renewed outflows from equity funds, led by the US. Outflows from equity funds totaled -$9bn last week with -$6.5bn from US. Japan (+$3.6bn) and EM (+0.1bn) continue to see inflows amid outflows from other regions.
Curiously, equity ETFs saw outflows on Thursday after strong inflows during most of December, even as the Dow had just enjoyed its biggest point gain ever.
Meanwhile, outflows continue from Credit and Bank Loan funds, while Government bonds see inflows. Outflows from bond funds slowed this week (-$5bn), with Europe bond funds seeing a small inflow. Outflows were led by Corp HY (-$4.5bn), Bank Loans (-$3.4bn), Corp HG (-$2bn), and EM bonds (-$1.5bn) while inflows to Govt bonds picked up (+$6.4bn).
Finally, ETF and futures volumes were normal, stock volumes were light. Daily futures and ETF volumes were normal despite the holiday week, however stock volumes were quite light. Because of the light stock volumes, ETFs were a near record 43% of total cash volumes throughout the week.
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