by | Aug 9, 2016 | Hedge Funds

Last Updated: August 17, 2016

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After the rough couple of months that many hedge funds have endured with their returns from the beginning of the year, they were due for some better news. Many of the hedge fund managers were further discouraged by the financial climate after the Brexit referendum. They were unsure how great the economic and political fallout would be globally. The industry may have finally turned the corner in July according to several reports and the latest hedge fund performance results.

Barclays Report Shows that Investors Are Sticking with Hedge Funds

Barclays has recently released its new report from their Prime Services Consulting on the Hedge fund industry entitled Against All Odds – Hedge Fund Industry Developments and Implications for Growth. The report had some negative news for the industry but also some encouraging points. It demonstrated that hedge funds delivered significant returns above their targets since 1993, though they have peaked from 2011. Some of this is due to the managers’ decisions to reduce their risk.

The last few years’ performances have been less impressive. Barclays surveyed investors in the report and learned that over half of them felt the funds had not lived up to their expectations during the past several years. The encouraging news was that the overwhelming majority of investors who participated in the survey stated that they were not substantially recalling their money from the hedge funds.

Hedge Funds See Best Returns of the Year in July

While hedge funds have experienced a challenging year so far in 2016, they saw a significant rally for last month. Bank of America Merrill Lynch analysis shows the hedge funds have averaged 1.3% growth across the industry in July. This is now the fifth consecutive monthly gain and also represents the biggest increase for the year to date. The positive results are broad-based and span a wide range of asset classes. It supports the idea that the hedge fund managers are making a comeback after the wild ride leading up to and after Brexit and other financial and political turmoil around the world. This has encouraged some investors about the next coming months.

Less Fear of Risk Helps Hedge Fund Managers Boost Performance

The increasing comfortability with risk comes a few weeks after the Brexit vote did not lead to a financial collapse or a lengthy global economic pullback that many feared. The hedge fund managers have become more confident that central banks will stay on guard for signs of resulting economic problems. This has allowed the funds themselves to add riskier investments and positions to their portfolios.

What you see as a result is a newfound cautious optimism in the hedge fund industry. To be sure investors are still nervous about the coming few months. GAM Portfolio Manager Anthony Lawler believes that the fears are mostly due to the increasing cost of assets along with continued concerns that growth in the global markets will be low. Others are worried about the Chinese economy and its future or the Federal Reserve’s upcoming interest rate decisions. This has been offset in part by the loosening monetary policy that has helped the risk-on trade to reemerge. Some funds have managed to capitalize on this trend and post fantastic gains for July. Marcato Capital Management boasted more than 10% for the month, though it is still underwater for 2016 as a whole.

Quantitative Hedge Fund Approach Continues to Grow in Favor

More good news for hedge funds is that at least one segment of the industry is doing very well. The computer-driven model funds have notched substantial gains all through the year 2016. This in turn has encouraged investors to turn to these funds that follow such a quantitative approach as a proven strategy in this difficult investing environment. Even as the computer modelled funds are leading the pack, a number of other investment approaches also managed gains for the month. This caused gross and net exposure for the funds to rise throughout the hedge fund industry as risk appetite returns. Fund managers are holding on to hope that they can continue to see these kinds of results for the remainder of the year.

Emerging Markets Again A Profitable Trade in Hedge Fund Strategies

One trade that has significantly helped the hedge funds to improve their performance and their appeal is the comeback in the emerging markets. Hedge fund managers have long been a fan of the group. It had fallen behind the performance of other segments but has begun to show strong returns again. The emerging markets had a terrible start of 2016 but have improved dramatically. The MSCI Emerging Markets index has shown a 27% gain since the end of January.

Funds that focus on this sector have managed to bring in $1.2 billion in new long positions for July, per Bank of America Merrill Lynch. This brings them back to $15 billion in net long assets. They have not seen such a strong position since the beginning of the Merrill Lynch records in October of 2009. Pakistan has been the leading destination for money moving into these emerging markets, according to the report from the Institute of International Finance in the Wall Street Journal

Wesley Crowder

W.D. Crowder is an American published author. His background and areas of expertise include history, economics, retirement, finance, expatriate living, international relations, investments, and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.