European Hedge Funds Hit Amid Brexit Volatility

A Morgan Stanley prime brokerage report finds hedge funds generally found June difficult, with European funds leading the charge lower amid Brexit carnage.

Also see top hedge fund letters.

Hedge funds once again out pace stock indexes to the downside

Global hedge funds were down on average -0.39% in June, the Morgan Stanley Prime Brokerage Global Hedge Fund Performance report shows. The soft June performance comes as the group is off -1.72% on the year.

The FTSE Global 100 index was down -0.78% over the period, the MSCI Emerging Market index was up 2.92% in June and the S&P 500 index was down -0.80%.

There was a decided regional tilt to the overall decline in hedge fund returns. European funds were the hardest hit, down -1.12% in June and off by 2.66% on the year.

The Brexit vote was a surprise to markets as was the market reaction, as pointed out right before the vote by Preqin. The Euro Stoxx 50 started the month at 3038, then reached its first “V” bottom on June 14 at 2797, a sign of things to come. The market recovered to challenge new highs at 3037 on June 23, then the Brexit vote hit. Stocks sold off significantly, with the Euro Stoxx 50 crashing to 2697 in the two days following the Brexit vote. Unlike other major world averages the Euro Stoxx 50 only recovered to 2883 before experiencing selling to start this week. The FTSE 250, a broad-based measure of UK equity investments, had a similar chart pattern while the FTSE 100 regained most of its lost ground.

In Europe, the equity long/short funds performed worse than the hedge fund average, with the median fund down -1.84% on the month. Certain long/short hedge fund strategies, particularly if they have volatility-based risk management systems that adjust long/short ratios, can find difficulty in such “V” shaped sell-off and recovery market environments.

There were some notable exceptions such as Odey as we pointed out earlier.

Asian funds least impacted on monthly basis, but down most on the year

Asia-based hedge funds were the least impacted on the month, down -0.26%. Asian funds, however, are down -4.16% on the year.

The Nikkei 225 has had a particularly difficult 2016. Like most global stock markets, it experienced a large sell off in January and early February. It did experience a February 12 bounce after US markets recovered a day earlier, but the bounce, relative to the S&P 500, was tepid. The Nikkei 225 raced to new year to date lows in the wake of the Brexit vote and was never able to gain momentum.

US hedge funds were down -0.30% on the month, according to Morgan Stanley’s performance estimates. Like Asian funds, the equity long/short strategy led to the downside with -1.02% performance while event driven funds were up slightly on the month, 0.13%.