27 Jun How Top Hedge Funds Weathered Brexit Day
Turbulence and uncertainty prevailed in global markets the day after Britain shocked the world by voting to leave the European Union. The S&P500 index lost -3.59%, which essentially wiped out all its 2016 gains in one day. MSCI Europe (USD) and MSCI World (USD) lost -8.77% and -4.90% respectively. At the same time, Quantvest’s Eurekahedge 50 Tracker Index (Bloomberg: EHFI401 ), which tracks performance of the 50 world’s “superstar” hedge funds, declined only -0.36%.
For institutional investors who wonder how their funds may have weathered the Brexit storm, the EH50 Tracker, a daily investible index, represents a close proxy. Since its launch in January 2015 by Quantvest Capital, EH50 Tracker has followed closely the performance of its benchmark, the Eurekahedge 50 Index. After Friday’s decline, EH50 Tracker is holding gains for the year, remaining positive at 0.60%.
The EH50 Tracker Index is designed to track the performance of a diversified group of the world’s largest hedge funds with combined assets of approximately $150B containing a breadth of investment strategies including global macro, relative value, event driven and equity long/short. As a result, the portfolio behaves differently from equities and bonds. This is evident from the chart below showing rolling 26-week correlations of the Tracker Index against S&P500 and Barclays Aggregated Bond indices.
It’s worth noting that the E50 Tracker’s correlation to S&P500 declined markedly, from almost 90% to under 60% in the past couple of years. This could serve as indication of large hedge funds decreasing their exposure to equities. At the same time, the Tracker displays consistently negative correlation with the aggregate bond index.
Steady decline of the Tracker’s equity market beta (as shown in chart below) may be yet another indication of top fund’s potential hedging activity prior the Thursday’s vote.
A beta against S&P500 of 0.10 means a 1% move in S&P500 only results in 0.1% move in the Tracker index. This is consistent with the results we observed this past Friday. Volatility of the Tracker remains steady and low on par with the Aggregate Bond index.
The EH50 Tracker is an index that tracks the performance of fifty large, institutional hedge funds. Since the Tracker consists of liquid market indices it provides investors with ability to glean into consensus of market bets of the constituency funds on daily basis. Such transparency and timeliness is especially important during periods of market stress. The recent events, as well as past periods of high market volatility, confirm the ability of hedge funds to properly navigate treacherous conditions, and diversify a more traditional portfolio.