When Bonds are Worth the Risk | Chief Investment Officer

(February 4, 2014) — Investors who took a punt on relatively risky fixed income over last five years would have notched up the best possible risk-adjusted returns for their portfolios, research has shown.

US and European high-yield had the best performance, on both an excess return and Sharpe ratio basis in the five years to the end of 2013, consulting firm Redington found.

US high yield returned 18.2% overall with a 2.05 Sharpe ratio, while its Europe-issued counterpart made 21.1%, but with a slightly worse Sharpe ratio of 1.77.

The next best performer on a risk-adjusted bases was US leveraged loans. This category of fixed income made 13.1% on an absolute basis with a 1.68 Sharpe ratio.

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“Over a five-year period, US high yield has been the top performing asset class on a risk-adjusted basis over the last three quarters with a Sharpe Ratio of 2.05 in Q4,” a note from Redington said. “European High Yield has produced the highest excess return for the same three quarters with an excess return of 21.1% in Q4.”

One asset class has been underperforming for longer than these have outperformed.

“Hedge Fund – Macro has been the only asset class to consistently offer a negative excess return over the time horizon, having done so now for six successive quarters,” Redington said.

The sector finished off the five-year period with a 4.1% loss.

Over a three-year period, the top two performers maintained their positions, being followed by risk parity, which made an 8.2% excess return, with a 0.91 Sharpe ratio.

Looking at the past year, however, developed market equities have cantered past fixed income securities, making 26.4% over 2013 with a 2.89 Sharpe Ratio.

To read the full research note, click here.

(February 4, 2014) — Macro and managed futures-focused hedge fund strategies have yet to recover from the financial crisis as many continue to suffer capital outflows and poor performance, according to data firm eVestment.

Many of the industry’s major players follow these strategies, including Brevon Howard, Bridgewater Associates, and Tudor Investment Corporation.

In strong demand during the late 1990s and early 2000s, both macro and managed futures approaches have failed to bounce back from 2008 and are lagging far behind the hedge fund industry, the firm stated in a report. Cumulative gains in macro strategies were just half of the hedge fund aggregate over the last five years at around 25%. Performance for managed futures has also flatlined since October 2010.

The two strategies underperformed their peers in the fiscal year 2013, with macro strategies returning 2.84% and managed futures losing 1.87%.

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Assets under management (AUM) for both types of funds decreased in 2013, according to the report, whereas capital flowed into the industry as a whole.

Combined AUM was $357 billion at the end of the fourth quarter in 2013, a figure higher than that of previous two quarters due to a pick-up in performance late in the year. Macro funds’ AUM declined 1% in 2013 to $213.2 billion and managed futures funds’ AUM hit the lowest level since 2007, at $143.8 billion.

eVestment found liquidations of these two strategies overwhelmed fundraising by new entrants, attributing the trend to performance and flow momentum.

Since the financial crisis, “multiple years of poor performance and an inability to recover lost high water marks have prompted further liquidations at rates higher than during that experienced during the financial crisis,” eVestment said.

However, funds with more than $1 billion under management outperformed small and mid-sized peers in FY 2013, a trend that could continue in 2014 “if those larger managers with an enhanced capacity to ride a poor asset gathering environment outperform smaller managers,” the report stated.

The report’s authors expected these issues to remain going forward without significant revitalization of the two strategies.

“What was once their largest asset base, the commingled funds of hedge funds industry, has been rapidly shrinking as well,” the report said. “While there has been an increase in bespoke portfolios within the funds of hedge funds space by larger institutions, it is likely these same institutions have been using hedge funds for less correlated exposures to markets with which they are significantly more comfortable, namely credit and, more recently equity markets.”

However, hope for macro and managed futures funds could be found in the recent shaky equity markets and potential for a rebound in fixed income markets, eVestment said.