Just past the midpoint of 2018, hedge funds remain in positive territory. The HFRX Global Hedge Fund Index reports hedge funds up 0.29% at mid-June, a figure that will likely remain positive through the remaining days in June.
While returns through the first one-half of the year are almost certain to be positive, the result will be far short of the ambitious forecasts for hedge fund performance in 2018, expected to be north of 7 percent. To reach that goal, hedge funds would need to produce average monthly gains in excess of 1 percent for each of the remaining months in 2018, a feat that seems unattainable at this juncture.
The volatility of global markets has proved to be a double-edged sword. It has fostered renewed enthusiasm for the hedge fund industry, which, ostensibly, fares better in volatile markets. However, after nearly a decade of the bull market, hedge funds have struggled with the return of volatility to the market place.
Skills once honed to thrive in volatile markets became somewhat rusty and based upon year-to-date gains for the industry, there remains rust to be scraped away.
The Trump Factor
For the first time in recent memory, we have a President whose unpredictable tweets and unedited pronouncements have caused markets to behave in ways never before seen. Harley-Davidson being but one example.
Harley-Davidson (HOG) closed at $44.21 on June 22, 2018 and after Trump’s tongue-lashing, fell to $41.57 by close of business June 25, 2018…a decline in share value of nearly 6 percent, not to mention over $400 million in market cap.
Oil is another area of consternation, as Trump schmoozes the Saudi king to ramp up production in order to bring down gasoline prices and squeeze the Iranian economy.
Uncertainty Breeds Volatility
There is no shortage of uncertainty in Trump’s administration and, as a result, there will be no shortage of volatility in the markets going forward. Whether one regards this as a good or a bad thing is irrelevant. All that matters is that portfolio managers get their heads around this new paradigm and be prepared to react swiftly, if not preemptively.
Until very recently, hedge fund performance, although in sub-single digits for most of the year, has been well ahead of market performance,, especially the DOW. More recently, the S&P 500 has edged ahead of the hedge fund industry’s year-to-date gains, but this may be short-lived.
In the past, geopolitics were a significant variable occupying the sleepless nights of portfolio managers.
Now, there is the additional concern of domestic political earthquakes courtesy of President Trump. Those who enjoy a challenge will undoubtedly relish this new input and what hedge fund manager doesn’t enjoy a challenge? Successful portfolio managers will make certain to clear away the rest of the rust quickly in preparation for the ramifications of the next tweet or announcement at the next rally.
Those who fail to understand this President’s affect on markets, corporations, and the economy in general are doomed to failure, while those who accept the new reality may position themselves to reap great rewards for their investors.