HF Nov 2020 Performance Snapshot
Speculative conditions were omnipresent in November where the share prices of companies facing bankruptcy rose by 50% to 100%. Elevated central bank and government liquidity provisioning can be found in the case of electric vehicle car maker Tesla, whose share price has risen from $72 to $600 in the past six months and now trades at 1100x earnings with a market capitalization larger than the entire auto industry combined.
Unsurprisingly, Morgan Stanley observes that November 2020 was the worst "alpha" month for hedge funds since September 2019.
2016 was the WORST!
HF underperformance accelerated into month-end: Hedge funds seemed to trade the US election well, but hit issues with the perpetual bid into month-end from positive vaccine developments. Short equity positions and any kind of mean reversion macro trades kept bleeding losses as the month progressed.
Will this frantic risk on bid ever cease?
When the dust settled, hedge funds did in fact deliver healthy profits on an absolute basis with prime brokerage estimates for Equity Long/Short up 4% to 6%. We witnessed wide variability of performance with most quant strategies lagging, and fundamental discretionary Equity Long/Short, Macro and Event Driven strategies flat to positive within a substantially wide range. Some upside outliers kept pace with global equities registering high single digit/low teens numbers, while other funds delivered modest single digit results with a few macro funds getting caught in risk off positioning closing November in the red.
HF Risk Taking Remains Elevated: Hedge fund gross and net exposure levels closed out November at healthy risk levels. Although, prime brokers witnessed aggregate gross and net reduction flows heading into month-end, which intuitively makes sense given typical seasonality patterns for hedge fund managers to reduce risk into the illiquidity vacuum around year-end.
EU Banks, a popular cyclical trade: Many educated investors are focused on the potential for European bank outperformance. The general hedge fund investing public seemed to agree in November as net exposure to European banks rose materially in November.
What about EM/China? Interestingly, prime brokers observed net selling of Chinese equities in November. We have yet to confirm whether Chinese local HFs are fueling this trend since our latest conversations continued to confirm Chinese secular growth and demographic trends remain intact. We suspect net China selling could be coming from global HFs who reduced Chinese exposure in the wake of the BABA/Ant IPO debacle and potentially rebalanced towards US-oriented themes. In fact, Macro managers postulate that EM generally is becoming an afterthought because 2021 developed market growth expectations are so robust.
Who is selling? Is it IWM buyers?