SEB likes hedge funds, despite “a real beating” for industry in May

The recent sharp turnaround in the oil price and jump in the dollar could have vaporized up to one third of the returns hedge funds had made this year, and wiped up to 4% from returns of the popular trend-following strategy in just five days, says SEB.

The Swedish bank wrote in a regular investment outlook document that many funds in the $2trn industry had built up positions this year that were predicated on a weaker US dollar and rising oil prices.

The Scandinavian bank then wrote about early May: “The market situation changed dramatically when the dollar quickly began to appreciate and oil prices dropped by around 15% in a short period.

“Such sharp, rapid movements obviously affect hedge funds, especially those that build up positions that follow market trends, [and] have the potential to wipe out a third or more of a year’s returns in as short a period as a week or so.”

SEB then listed systematic computer-driven multi-asset management funds (commonly called CTAs), global macro and long-biased equity long/short managers as those to “take a real beating, with downturns of around 2.5% to 4% on index levels for a week.”

Up to the start of May, CTAs made 0.92%, global macro returned 2.23% and equity long/short made 3.6%.

After some severe losses, global macro ended May down 2.11%; and equity long/short closed the month 2.63% lower, according to Hedge Fund Research’s investible indices, an early gauge of industry-wide performance.

Overall the industry lost 1.39% on its investments in May, its first monthly loss for nine months and its most severe since June 2010.

SEB said, as the recovery continues it expects pattern of “funds performing very well in some months, then losing a lot of value in other months” to be repeated, “with a correction about every four months”.

Apart from this bumpiness, SEB paints what it describes as “a very favourable scenario for hedge funds.

“Momentum is on the side of hedge funds, and we expect the overall investment climate to improve even further. As always, quality plays an extra large role for hedge funds, but by way of summary, the investment climate is good.”

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