February and March brought sharp swings in asset prices, making it a period when hedging strategies were put to the test. The fall in stock markets did indeed lead to a surge in short bets, so how did hedge funds fare in the first round of Covid-19 volatility?
The average figures are not pretty. The Eurekahedge Hedge Fund Index fell by 6.35% throughout March, while assets under management fell $136.2bn (£112bn) due to a combination of poor performance ($94bn/£77.2bn) and net outflows of $42bn (£34.5bn). However, when weighed against the performance of the MSCI World, which has dropped -12.4% year to date, it could be argued that hedge funds did shave off some of the downside risks.
While the lack of portfolio disclosures makes it hard to develop aggregate data on hedge fund strategies and performance, MSCI has made the effort to gain an insight into trading patterns, sector preferences and outperforming strategies.
It highlighted that, unsurprisingly, hedge funds generally increased their exposure across all sectors in the first three months of 2020 as markets were falling.
Throughout February, hedge fund investors stocked up on information technology and communication stocks whilst only gradually increasing exposure to energy companies. This bet appears to have partially paid off in March as information technology stocks rose against an otherwise falling market.
But their increase in shorting has not been well received. By the end of March, UK investors raised their short positions against UK-listed firms to more than 500 a day from a pre-crisis average of 32 positions. This prompted Bank of England governor Andrew Bailey to issue a plea to investors to hold off on short bets.
Several European countries, including Italy, Spain, France,Greece and Austria have imposed temporary restrictions on short selling, which were lifted again in May. The FCA said it would not rule out future bans but would set the bar for such restrictions high.
Data from the FCA’s register on short positions against UK- listed firms suggests that many of those bets had already preceded the crisis. Firms such as Odey Asset Management, Citadel, AQR and Marshall Wace already held prominent bets against UK-listed firms due to the potential impact of Brexit, from Debenhams to Intu Properties to bets against the Royal Mail and Rolls Royce. But these firms now upped their existing short positions.
Yet fund performance data from Morningstar suggests that these short bets don’t always pay off. Marshall Wace’s Market Neutral Ucits fund is down more than 5% YTD, while Crispin Odey’s Swan Fund rose by more than 18% in the year to March, while by the end of that month, performance fell to 5%.