March hedge fund performance moving higher, but disappointing first quarter

With equities moving higher and credit spreads tightening, hedge funds with equity beta exposure  showed strong returns. The exception was with the CTA and global macro indices which posted the largest declines. The best hedge fund strategies included market directional, fundamental growth, distressed, and emerging markets. It was a clear risk-on environment for the month.

Nevertheless, most hedge fund strategies did not do well during the first quarter of the year. The only strong performer was the systematic CTA index which posted returns over 6%. The directional equity hedge funds have return differentials of over 12 percent relative to the CTA leader.

The first quarter just provides more evidence that all hedge fund strategies are not alike. If there is more financial turmoil, the divergent strategies like managed futures will perform well. This strategies take advantage of market turmoil. Convergent strategies which focus on markets remaining well-behaved or those that have higher exposure to market beta will be harmed. 

What was a true disappointment is that many hedge fund managers were not able to protect wealth on the way down and then gain returns when the market reversed. Most strategies were slow-footed at adjusting market exposures. It will take some work to match CTA's if the divergent strategies hold their gains.