Last year was solid for most funds of hedge funds. Citco reports that the average return was 11.2% among the funds it manages, while the median return was 9.9%. The strength continues into this year, as Eurekahedge reports that hedge funds had their most robust first-quarter performance since 2006.
A decisive year for funds of funds in 2020
The firm also said 93% of the funds it oversees had a positive year in 2020, and the fourth quarter was robust. Over 96% of the firm’s funds of funds had a positive fourth quarter. The average fourth-quarter return was 7%, while the median return was 5.1%.
Citco found a more significant variance of returns among smaller funds and those with more concentrated portfolios and larger mandates in its recent report. All funds with more than $500 million in assets under management had a positive year in 2020, and the average return of funds of funds with more than $1 billion was 11%.
The average return of hedge funds with less than $200 million in assets under management was 7.26% during the fourth quarter and 10.64% in all of 2020.
In terms of capital flows, funds of funds were primarily flat last year, as inflows and outflows essentially canceled each other out. Net outflows were marginal at less than $1 billion for the entire asset class. Most of the inflows went to larger asset managers, while smaller managers saw net outflows on average.
The best first quarter for hedge funds in years
Funds of funds will also benefit from the strong performance among other hedge funds during the first quarter, marking a continuation of the strong tends from 2020. The Eurekahedge Hedge Fund Index gained 0.95% in March on the back of the solid global equity market. The MSCI ACWI gained 3.24% during the month. For the first quarter, funds returned 4.79% on average. About 73% of the funds posted positive returns for the first quarter.
Meanwhile, long-dated U.S. Treasuries continued to sell off, boosting the 10-year Treasury yield by 34 basis points to end March at 1.744%. The Federal Reserve plans to hold monetary policy accommodations for at least two more years and allow inflation to surpass 2% before thinking about any changes to the policy.
As a result, investors started to worry that the massive amounts of economic and monetary stimulus rolled out so far will result in rising inflation. The U.S. equity market continued to post strong returns in March, as the Dow Jones Industrial Average climbed 6.62%, while the S&P 500 rose 4.24%. Stocks were supported by the $1.9 trillion economic stimulus package and ongoing vaccination rollout.
For now, the Biden administration is weighing a multi-trillion-dollar infrastructure package, which will also support economic growth. In Europe, equity benchmarks were positive, with the DAX Index returning 8.86% and the Euro Stoxx 50 up 7.78%.
Details by strategy
On an asset-weighted basis, hedge funds declined 0.24% in March. The asset-weighted index is up just 0.95% year to date, demonstrating how many challenges larger fund managers are having with current conditions.
North American hedge funds gained 1.56% last month on the back of strength in the Dow Jones and S&P. Year to date, North American hedge funds are leading the way with a 6.77% return. Long short equity funds gained 1.26% in March and 6.49% year to date, a massive improvement from the -11.39% return in last year’s first quarter.
Equity long-bias funds were up 2.58% in March and 8.66% year to date, beating the S&P 500’s 5.77% return. The top 10% of equity long-bias funds averaged a return of 16.84% for the first three months of the year.
The Eurekahedge Event-Driven Hedge Fund Index was up 1.59% last month and 6.91% year to date, while the Crypto-Currency Hedge Fund Index returned 19.19%, underperforming bitcoin’s 25.92% return. Year to date, cryptocurrency hedge funds are up 116.81%, beating bitcoin’s 104.16% return.