Hedge Funds End Strong 2021 with December Gains
Posted by Colin Lambert. Last updated: January 12, 2022
Hedge funds advanced in December to conclude a strong year, according to the HFRI 500 Fund Weighted Composite (FWC) Index.
In a year dominated by uncertainty and high volatility, as managers navigated the dual challenges of increasing interest rates and inflation, as well as the impacts of the second year of the global coronavirus pandemic, the investable index gained 0.9% in December, reversing the prior month’s decline, while the HFRI Fund Weighted Composite Index (FWC) advanced 1.3%. For the full year 2021, the HFRI FWC gained 10.3%, narrowly trailing the prior year’s gain of 11.8% but marking the third highest calendar year performance since 2009. Funds investing in cryptocurrencies unsurprisingly led, with the HFR Cryptocurrency Index surging 215%, topping the 2020 return of 193%.
The performance dispersion of the underlying HFRI index constituents narrowed in December, with the top decile of the HFRI gaining an average of +6.6%, while the bottom decile declined by an average of 3.5%, representing a top-bottom dispersion of 10.1%, compared to 19.1% in November. For the full year 2021, the top decile of the HFRI soared by an average of 45.6%, while the bottom decile declined by an average of 12.3%.
Fixed income-based, interest rate-sensitive strategies also advanced for the month, as interest rates increased and managers continued to position for the near-term tapering on bond purchases by the US Federal Reserve. The investable HFRI 500 Relative Value Index gained 0.2% for the month, while the HFRI Relative Value (Total) Index advanced 0.3%. Sub-strategy gains were led by the HFRI RV: Yield Alternative Index, which gained 2.4%, as well as the HFRI RVA: Volatility Index, which added 1.4%, with both reversing the prior month’s declines. For the full year 2021, RVA performance was led by the HFRI RV: Yield Alternative Index which returned 30.9%.
Macro strategies also advanced for the month, as commodities gained while interest rates continued to rise, with the HFRI Macro (Total) Index advancing 0.65%, while the investable HFRI 500 Macro Index posted a narrow decline of 0.05% for the month. Macro sub-strategy gains were led by the HFRI Macro: Multi-Strategy Index which jumped 2.9% in December. For the full year 2021, Macro sub-strategy performance was led by the HFRI Macro: Commodity Index, which surged 23.6%.
The HFRI Diversity Index gained 1.9% in December, while the HFRI Women Index added 0.5%.
“Led by high-beta strategies of Equity Hedge, Event Driven and commodities, hedge funds concluded 2021 with strong performance in December, capping a robust two-year period and successfully navigating extreme volatility and market cycle dislocations since the inception of the coronavirus pandemic and global quarantine as the total hedge fund industry surpassed $4 trillion in capital,” says Kenneth Heinz, president of HFR. “Since and inclusive of the historic equity market collapse from the outbreak of the global pandemic, equity-focused hedge fund strategies have significantly outperformed US equities (as represented by the DJIA) by over 200 basis points and have done so with one-third less volatility.
“Into 2022, hedge fund managers are positioning for continued volatility associated with the global pandemic but are also tactically focused on capital preservation across equity, fixed income, and commodity markets, considering the powerful dynamics of rising interest rates and record inflation,” he adds. “Managers which have demonstrated the robustness of their strategies over the past two years will likely continue to lead industry performance and growth though the new year.”