Introduction
Sentiment towards the hedge fund sector has been particularly negative over the last 10 years. In the following presentation, we evaluate hedge fund performance versus Greater China hedge funds, a less trafficked, and burgeoning corner of the hedge fund market.
BridgeWood believes that a confluence of factors unique to China, may provide fertile ground for managers, to generate compelling absolute returns. We’ll identify considerations that institutional investors might contemplate in their increasingly illusive quest for alpha.
Our objective is not to proselytize our view but draw attention to several observations that we find thought provoking.
We’ve selected Eurekahedge indices as proxies for both the broad hedge fund sector and the Greater China sub-sector. While we understand the limitations and inherent biases embedded within hedge fund indices, let alone the selection of which index to use, we’ve chosen Eurekahedge as they publish monthly data spanning 20+ years for each cohort*.
* Please note: The initial starting period used throughout this presentation largely coincides with the 12/31/1999 inception date of the Euerkahedge Greater China Hedge Fund index.
Hedge Fund and S&P 500 Performance: (1)(2)
• Hedge funds,on a cumulative basis, have done well over the last 20 years.
• However, high excess returnsin the early 2000’s spring-loaded the hedge fund index while the post-GFCreturns have been less compelling.
(1) Source: Eurekahedge Hedge Fund Index (Bloomberg Ticker - EHFI251) data as of 4/22/2020 with 67% of Funds reporting March 2020 performance. The Eurekahedge Hedge Fund Index is an equally weighted index of 2362 constituent funds that is designed to be a broad representation of the hedge fund asset class. Monthly performance data from 12/31/1999 – 3/31/2020 and indexed from base value of 100 on 12/31/1999.
(2) Source: Bloomberg S&P 500 data using adjusted closing prices at month end. Data from 12/31/1999 – 3/31/2020 and indexed from base value of 100 on 12/31/1999.
Annual Hedge Fund Absolute Performance: (1)
While hedge fund returns have still been positive in 9 of the past 11 years, the absolute returns have been less attractive than the pre- GFC period.
(1) Source: EurekaHedge Hedge Fund Index (Bloomberg Ticker - EHFI251) data as of 4/22/2020 with 67% of Funds reporting March 2020 performance. The Index is an equally weighted index of 2362 constituent funds. The chart reflects data for the period 12/31/1999- 03/31/20. The average returns for the period from 2000-2008 and 2009-2019, as illustrated above, are the arithmetic averages of the annual full calendar year returns. Q1 2020 was omitted from the average return calculation for the post-GFC related period to avoid the inclusion of non full calendar year performance data and annualized data derived from one quarter.
Annual Hedge Fund Relative Performance: (1)(2)(3)
• In fact, hedge funds, as measured by Eurekahedge, have generated no alpha vs. the S&P 500 almost every year during the period of 2009-2019 as industry AUM ascends to all time highs.
(1) Source: EurekaHedge Hedge Fund Index (Bloomberg Ticker - EHFI251) data as of 4/22/2020 with 67% of Funds reporting March 2020 performance.
(2) Source: Bloomberg S&P 500 data using adjusted closing prices at month end. Data from 12/31/1999 – 3/31/2020 and indexed from base value of 100 on 12/31/1999.
(3) Source: Backstop BarclayHedge Hedge Fund Industry AUM data as of 12/31/2019
How did we get here?
*Please note: All opinions expressed above are solely that of BridgeWood as of 3/31/2020 and subject to change.
Introducing Greater China Focused Hedge Funds:
• China focused hedge funds, as measured by the Eurekahedge Greater China Hedge Fund Index, have demonstrated strong returns on both an absolute and relative basis over the last 20-year period.
• BridgeWood believes that a confluence of factors, not limited to the following, serve as potential contributors:
• Investors might consider China focused hedge funds (regardless of their respective directional view on China markets) due to the unique factors that make China markets conducive to alpha generation.
• As always, individual manager selection will remain of paramount importance.
* Please note: All opinions expressed above are solely that of BridgeWood as of 3/31/2020 and subject to change.
Greater China Focused Hedge Funds: (1)(2)
• Greater China Hedge Funds, as illustrated by the Eurekahedge index, have generated impressive performance over the last 20 years, far outpacing the Eurekahedge hedge fund index cohort.
(1) Source: Eurekahedge Greater China Hedge Fund Index (Bloomberg Ticker - EHFI114) data as of 4/21/2020 with 50% of Funds reporting March 2020 performance. The Index is an equally weighted index of 69 constituent funds. The index is designed to provide a broad measure of the performance of underlying hedge fund managers who invest exclusively in Asia. Monthly performance data from 12/31/1999 -3/31/2020 and indexed from base value of 100 on 12/31/1999.
(2) Source: Eurekahedge Hedge Fund Index (Bloomberg Ticker - EHFI251) data as of 4/22/2020 with 67% of Funds reporting March 2020 performance. The Eurekahedge Hedge Fund Index is an equally weighted index of
2362 constituent funds that is designed to be a broad representation of the hedge fund asset class. Monthly performance data from 12/31/1999 – 3/31/2020 and indexed from base value of 100 on 12/31/1999.
Multi-Period Performance Analysis: (1)(2)
• Greater China hedge funds have outperformed the broader hedge fund cohort on a cumulative basis over the last 3, 5, 10, and 20-year periods.
(1) Source: Eurekahedge Greater China Hedge Fund Index (Bloomberg Ticker - EHFI114) data as of 4/21/2020 with 50% of Funds reporting March 2020 performance. The Index is an equally weighted index of 69 constituent funds. The index is designed to provide a broad measure of the performance of underlying hedge fund managers who invest exclusively in Asia. Monthly performance data from 12/31/1999 -3/31/2020.
(2) Source: Eurekahedge Hedge Fund Index (Bloomberg Ticker - EHFI251) data as of 4/22/2020 with 67% of Funds reporting March 2020 performance. The Eurekahedge Hedge Fund Index is an equally weighted index of 2362 constituent funds that is designed to be a broad representation of the hedge fund asset class. Monthly performance data from 12/31/1999 – 3/31/2020.
China Equity Market Performance:China Equity Market Performance: (1)(2)
• Investors are often drawn to China in the pursuit of long-term secular growth. Once a strategic asset allocation objective is
determined one must then decide how to implement: Passive, Active, or Both?
• As depicted below, China has experienced tremendous GDP growth, yet equity markets have been a poor barometer of this economic activity. Passive investors have been subject to major boom and busts.
(1) Source: Bloomberg as 3/31/2020. Data from 12/31/1999-3/31/2020 uses monthly adjusted closing prices for Hang Seng Index and Shanghai Composite. Indexed from 100 base value on 12/31/1999.
(2) Source: National Bureau of Statistics China - GDP in USD for 1999-2019. Data as of 4/9/2020.
Active Vs. Passive:
• Greater China hedge funds have generated substantial alpha vs. China equity indices.
• Active management in China markets can create significant value for investors.
(1) Source: Eurekahedge Greater China Hedge Fund Index (Bloomberg Ticker - EHFI114) data as of 4/21/2020 with 50% of Funds reporting March 2020 performance. The Index is an equally weighted index of 69 constituent funds. The index is designed to provide a broad measure of the performance of underlying hedge fund managers who invest exclusively in Asia. Monthly performance data from 12/31/1999 -3/31/2020 and indexed from base value of 100 on 12/31/1999.
(2) Source: Bloomberg as 3/31/2020. Data from 12/31/1999-3/31/2020 uses monthly adjusted closing prices for Hang Seng Index and Shanghai Composite. Indexed from 100 base value on 12/31/1999.
Multi-Period Performance Analysis: (1)(2)(3)
• Greater China hedge funds have outperformed the broader China equity indices on a cumulative basis over the last 3, 5, 10, and 20 year periods.
(1) Source: Eurekahedge Greater China Hedge Fund Index (Bloomberg Ticker - EHFI114) data as of 4/21/2020 with 50% of Funds reporting March 2020 performance. The Index is an equally weighted index of 69 constituent funds. The index is designed to provide a broad measure of the performance of underlying hedge fund managers who invest exclusively in Asia. Monthly performance data from 12/31/1999 -3/31/2020
(2) Source: Bloomberg S&P 500, Hang Seng Index, and Shanghai Composite data using adjusted closing prices at month end. Data from 12/31/1999 – 3/31/2020.
Why have Greater China Hedge Funds Performed Well? (1)(2)(3)
(1) Source: All Data from Hong Kong Stock Exchange, Shenzhen Stock Exchange, Shanghai Stock Exchange. Data as of 2/28/2020. FX conversion rates Yuan 6.99/USD and HK/USD.13
(2) Source: Eurekahedge – The Eurekahedge Hedge Fund Report April 2019