The month of December was characterised by strong stock market performance, while stock market volatility stayed close to historically low levels. Over this month, value and small-cap stocks underperformed the aggregate market. The conditions for the bond markets were favourable with decreasing short-term interest rates. Against this backdrop, most strategies have returns that are above or roughly equal to their historical averages. CTAs – suffering from decreasing commodity prices – and Short Sellers – suffering from the strong stock market – are the only strategies with negative returns in December.
Convertible Arbitrage funds achieved returns of 0.39% over the month of December, which is below the historical average. This rather low return comes despite rather favourable conditions for these managers, as characterised by the strong equity market performance and a decrease in the term spread. On the other hand, managers following this strategy had to deal with some bad news in December, namely decreasing short-term interest rates.
After several months of stellar performance, CTA managers were the only strategy besides short sellers with negative returns, posting returns of -0.52%. Against the background of a steep decline in commodity prices, this does not come as a surprise. Low levels of implied volatility together with the friendly bond market avoided even more negative returns for managers following this strategy.
Distressed Securities funds returned 2.50% in December. While the positive stock market performance and low volatility helped to achieve this result, the poor performance of small-cap stocks prevented managers in this strategy from achieving even better results.
Emerging Markets hedge funds posted a return of 2.29% in December. This result was facilitated by a stock market environment that was very friendly in general, though to a lesser degree for small-cap stocks. The low levels of implied volatility over this month were also favourable to emerging markets hedge funds.
Equity Market Neutral funds showed sound returns of 0.72%. This performance is roughly equal to the historical average, even though the performance of these managers was clearly hampered by decreasing levels of implied volatility and the performance of small-cap stocks. However, the strong performance of the broad stock market came as good news for managers in this strategy.
Event Driven funds were the top performing strategy in December with returns of 2.60%. This result was supported by positive equity market returns and low levels of credit spread and implied volatility, which meant very favourable conditions for Event Driven managers.
With a return of 0.51% in December, Fixed Income Arbitrage funds yielded the lowest return among all hedge fund strategies, except for short sellers and CTAs. Compared to their historical average, however, returns are still high. This can be explained by very low levels of volatility in both the bond and stock markets, which are typically favourable to these managers, with a return of 0.66% over the month of December, Global Macro managers achieved a result that was slightly below their historical average. This is in spite of largely favourable market conditions in December. In particular, macro managers benefited from positive returns in the equity and bond markets. Low volatility in both these markets was also good news for macro managers. The poor performance of small-cap stocks, on the other hand, may explain why returns are below average.
Long/Short Equity hedge funds posted a high return of 1.64% in December. Low levels of short-term interest rates, as well as the term spread and the credit spread, together with positive equity market conditions, meant very favourable conditions for managers in these strategies. The low returns of small cap stocks, on the other hand, hindered the performance of Long/Short Equity managers.
Merger Arbitrage managers posted returns of 1.15% on average in December. In addition to the friendly equity markets, low levels of short-term interest rates along with the low spreads in the bond market (credit spread and term spread) helped these managers achieve this result.
Relative Value hedge funds posted returns of 1.04% in December. This result is clearly above average. Conditions were largely favourable to Relative Value hedge funds with low credit spreads and high stock returns, as well as low levels of implied volatility.
With a return of -3.22%, short selling hedge funds were the only exception to a month of impressive performance for hedge funds. This does not come as a surprise, as they depend, conversely, on the direction of global stock markets.