2015 has come to a close and most in the financial community are probably happy to see it end. Despite a number of fear-inducing headlines that sent the VIX soaring to its highest level in years, US equity markets remained range bound. The year’s highest close on the S&P 500 represented only a modest 14.1% premium to its lowest.
Such was true of most asset classes. Volatility was elevated, but returns were largely modest. Aggregate U.S. stocks and bonds each earned less than 1%. Foreign assets fared better, but US investors with unhedged currency exposure saw those gains evaporate as a strong dollar overwhelmed foreign currencies.
Long only investors had few opportunities to earn large profits. Instead they could only hope to sidestep Mr. Market’s more extreme losses, of which energy commodities and equities, MLPs and emerging equities were paramount.
From the Long/Short Side
Unconstrained investors had a wider array of investment opportunities, but the results were largely the same. Only a handful of strategies in our Market Factor universe managed outsized risk-adjusted returns. Sadly, investors likely missed most of those as they generally came from sources that are either difficult to capture or that have produced historically underwhelming returns. Most of the more commonly followed factors were duds, among them commodity momentum, corporate credit spreads, equity size and value, developed and emerging market equity spreads, fixed income term structure strategies, FX carry and short volatility and variance factors.
Bright spots included commodity term structure and trend following, foreign high yield spreads, equity momentum and multi-asset class momentum. Anyone that had the foresight to short commodities, energy equities, MLPs, value stocks, emerging equities or foreign currencies probably had reason to smile at year-end.
Hedge Fund Strategy Performance
Given the abundance of mixed, but muted factor returns, it’s really not too surprising that so many hedge fund strategies posted forgettable returns. 21 of our 30 strategy indexes finished the year between plus and minus 4%. The highest earning strategy, Healthcare, managed only a 7.60% gain. Energy and Latin America-focused funds posted steep, double-digit losses and most event driven strategies lagged.
Attributing Gains and Losses – Winners
Equity Size (as a short): Like other equity segments, small caps had a disappointing year. They had an even worse year than large caps, causing those long the equity size factor additional grief. Hedge funds, however, were net overweight large caps, and several strategies actually benefited from the underperformance. Emerging Asia, Energy and Equity Short-Bias were the largest beneficiaries.
High Yield Credit Spreads: High yield had a mixed year as well, declining in the U.S., but performing well abroad. Several strategies rode these moves to profits, including Special Situations, Event Driven and Emerging Europe.
Equity Value (as a short): Equity value was one of the worst performing Market Factors this year, but hedge funds displayed prowess by shorting a historically profitable systematic risk. FANG stocks kept the market afloat in 2015 and several hedge fund strategies were on board. Technology, Healthcare and Equity Growth generated the largest gains from short value exposure.
Attributing Gains and Losses – Losers
Emerging Equity Spreads: There’s no sense downplaying it. Emerging equities had an awful year, losing in excess of 18% in Europe and 30% in Latin America. Most hedge fund strategies had little exposure, but those that did were absolutely crushed. All four of our emerging market composite indexes lost at least 4% from the spread between emerging market and developed market equities. Emerging Asia and Europe funds were able to climb back above zero through a combination of other factor exposures and alpha, but Latin America funds couldn’t escape the weight, finishing the year with losses approaching 24%.
Commodity Beta: Oil futures plummeted more than 45% in 2015, and they took the entire commodity complex down with them. It didn’t help that a strong dollar made USD-denominated contracts more expensive for foreigners either. Global Macro impressively sidestepped losses, but Energy and Commodities were hit hard. Several fixed income-oriented strategies joined in the declines as well, but to a much more limited extent.
Equity Sector Beta: Sector contributions were something of a mixed bag in 2015. Consumer equities and healthcare stocks materially outperformed the broad market, while materials and energy stocks did the opposite. Net sector exposures resulted in losses for the bulk of our hedge fund indexes, however. Not surprisingly, Energy had the largest loss by a significant margin.
Emerging FX: Only a handful of strategies were materially exposed to foreign exchange movements in 2015. Those that were suffered net losses. Latin America bore a disproportionate share.
MLPs: MLPs are supposed to be somewhat immune to commodity movements. Unfortunately that was not the case this year. Our MLP index was our worst performing non-commodity Global Benchmark, losing nearly 34%. Most strategies had only limited exposure to MLPs, but the magnitude of the returns turned even small positions into meaningful losses.
Activism/Concentrated Positions: 2015 was the year that several big name, hugely successful activist investors dined on humble pie. Bill Ackman’s Pershing Square lost more than 20%, as did David Einhorn’s Greenlight Capital. Concentrated positions may increase the odds of a large win, but they also increase the odds of a large loss, a fact numerous activists discovered first hand.
Attributing Gains and Losses – Winners and Losers
Alpha: Hedge funds may not display much alpha in the aggregate, but that doesn’t mean alpha can’t pop up in individual strategies. 2015 witnessed healthy dispersion in the metric as several strategies eked out excess returns, while others fell well short of their factor contributions. The largest winners? Healthcare, Emerging Asia and Commodities handily outpaced their systematic exposures. Latin America, Distressed Securities and Energy, however, comprised the opposite end of the spectrum.