Global equity market volatility in mid-October might have left the worst burn marks since 2008 on many hedge funds, but the stress has created performance dispersion that will help investors better distinguish producers of true alpha.
While equity markets have since rebounded and volatility has subsided somewhat, the week of Oct. 13 saw a “unique convergence” of unrelated and unexpected market developments that led to “amazing timing problems,” said Patrick Adelsbach, a partner at hedge fund consultant Aksia LLC, New York.
Scott C. Schweighauser, partner and president of hedge funds-of-funds manager Aurora Investment Management LLC, Chicago, summed up those factors:
- concerns over economic strength, particularly in Europe;
- a sharp drop in oil prices that worried hedge fund managers about prospects for growth in the global economy;
- “regulatory and bureaucratic overreach” specifically related to the proposed $54 billion acquisition of U.K. pharmaceutical company Shire PLC, called off by U.S.-based AbbVie Inc. because of U.S. tax inversion rules changes that came into effect after the deal was announced;
- uncertainty about the impact of the spread of the Ebola virus on airline, hotel, restaurant and leisure travel stock sectors; and
- lingering repercussions from a Sept. 30 court decision that said the federal government would not have to pay dividends to shareholders of Fannie Mae and Freddie Mac, to the disappointment of hedge fund holders.