With markets rallying for a third-straight day, it appears as if the $2 trillion hedge-fund industry has escaped August’s initial market turmoil with relatively minor casualties, according to investors and index data.
Hedge funds declined 3.7 percent from Aug. 1 through Aug. 10, according to Dow Jones & Credit Suisse’s “Core Hedge Fund Index,” which tracks daily performance for a basket of large hedge funds. Bank of America’s investible hedge fund index tells an even brighter story, citing a mere 2.6 percent loss over the same period, while Hedge Fund Research’s “HFRX Global Hedge Fund Index” falls in the middle of the range with a 3.3 percent loss through Aug. 11.
By comparison, the early stretches of this month saw broader equity markets take some of their biggest losses in years, and despite some intermittent rallies, many indexes suffered major body blows: the S&P 500 Index fell more than 9 percent through Aug. 11, while global indexes collectively fared even worse (the MSCI World Index skidded nearly 11 percent).
One reason the hedge-fund industry looks to have avoided more serious damage during that span: massive de-risking.
“Many [funds] were trimming risk, maintaining higher levels of cash, and positioning themselves for more market turbulence,” Brian Peterson, head of Credit Suisse’s hedge fund index group, told CNBC in a phone interview.
Peterson says many fund managers have been reducing exposure “in the weeks, or even months, preceding the correction,” noting in a company press release that “at this point, protecting the portfolio seems to be a clear focus.”
Funds began winding down risk positions in the second quarter, when the European debtcrisis and a looming U.S. debt ceiling debate sent dangerous volatility warning signals to investors, according to Ken Heinz, CEO of Hedge Fund Research, a Chicago-based research and investing firm that tracks performance for thousands of hedge funds.
“These were not things that happened in a vacuum,” says Heinz. “[D]e-risking occurred in (the second quarter of 2011) in response to these macro themes, which have been playing out across financial markets for over a year and half.”
Heinz also notes that macro hedge funds have markedly weathered the market storm. By limiting their exposures to equities and taking long positions in fixed income securities and gold, that subset of hedge funds actually made gains through Aug. 11.
But with many funds trimming risk positions, it is unclear if the industry will be able to react quickly enough to take advantage of the recent market rally. The S&P 500 spiked 4 percent on Aug. 11, rose 1.7 percent on Aug. 11, and was up more than 2 percent on Monday.
Hedge funds are up just 1.2 percent year-to-date through July, according to Hedge Fund Research, lagging the S&P’s roughly 3 percent gain.