Market neutral funds in H1 2018

Market neutral funds provide investment in less volatile non-risky options but many such funds are underperforming in 2018. Due to negativity in market, many European investors pulled money from long term funds and adopted mixed strategies. The AQR Equity had some of the worst performance in 2018 since its launch in 2014, where the losses increased in 2018. Even one of the largest funds - Vanguard fell 1.8 per cent in June – July, which is the worst of the year. 

Investors are putting money in such funds as it is better as compared to volatility of stock indexes.  Hedge fund industry grew 17.6 per cent in 12 months as per Barclay Fund Flow indicator. The highest inflow of funds was observed in fixed income funds where 6 per cent of the added assets were allocated and market neutral was high in demand during this time. In first quarter of 2018, emerging market equities were very popular but in Q2 the demand dropped.  In the coming months, the fund selectors are looking forward towards global emerging markets equities. 

Most such strategies have seen volatile results. In the first 5 months, these funds had positive returns, one of the longest after 2007 - as per Bloomberg. June was one of the worst for such strategies where technology stocks slipped and earnings declined.  

Comparing market neutral to other funds

Market neutrals are considered those with absolute returns but the returns by these funds can be lower than long/short in some conditions.   Alternative funds are added in portfolio to diversify and reduce correlation to equities. Some alternative funds provide the desired diversification into these funds but last few years have been tough for these funds. Market neural has a low correlation to markets but the income is very low and in the long run, these are somehow correlated to the markets.   

Hedge fund manager believe market neutrals returns should not be compared to equities. These are, mainly, designed to reduce risks as the investors have to give away with some gains to get secure returns.  These funds are arranged in a way to gain support during crisis in equity markets.  The fees taken for such fund managers are up to 2 per cent of the assets managed and 20 per cent of the gains. Previously, there were no such fees and the managers got a percent of returns. Since, these funds do not guarantee greater returns, investors expect the managers to reduce fees. 
Investors like - high net-worth individuals, institutions, pension funds, family office and others are diversifying in market neutral, L/S and using various ideas to manage risks closely.

Performance in July end

The US- China issue hit markets and some of the gains were reversed by the Bank of Japan’s monetary policies – which affected the performance of long – Japanese bonds.  In June, some investors withdrew from fixed income and multiple strategies, and invested in these strategies where in June inflow was highest.  The investors are keen on investing in US equities and are also adopting long/ short strategies. Long/short are expected to do better across various geographical regions. 

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