Risk is an inherent part of investing. And major global, national and financial events can quickly turn a solid risk model on its ear. For hedge fund investors, eVestment’s January 2017 Hedge Fund Exposure & Tail Risk Report seeks to quantify how events similar to major recent historical events might impact top hedge funds today.
To offer a broad look at the industry, the report looks at portfolios containing the following hedge funds reporting to eVestment: the 30 largest hedge funds by AUM, the top 10 long-short equity hedge funds, the top 10 fixed-income credit funds, the top 10 macro funds. Then eVestment tested those hedge fund groupings against a variety of disruptive events, including an event similar to the 2016 Brexit vote, the 2008 collapse of Lehman Brothers, the 2014 Russia/Ukraine situation and several others. The 30 funds in our analysis report AUM of about $467.49 billion, representing a bit more than 1/6th of the $3 trillion hedge fund industry.
Given continued sabre rattling and news-making from Russia and talk of other countries leaving the European Union, the hedge funds studied seem well positioned to withstand crises similar to Russia’s invasion of Crimea and the Brexit vote. And with more Fed rate increases likely in the near future, the hedge funds studied seem well positioned to withstand that with minimal negative impacts as well.
For all the hedge funds studied, an event similar to the 2008 Lehman Brothers collapse appears to offer the most negative risk, with funds seeing results of between about -9.4% and -18.3%. While government regulators and firms themselves have worked to minimize the economic impact of the implosion of a single, too-big-to-fail institution, these results highlight why such efforts might be important.
An event similar to the 2002 market downturn would negatively impact most of the funds studied (by between -11.65% for the top 10 long-short equity funds to -6.18% for the top 30 hedge funds), while the top 10 fixed-income/credit funds would be up about 2.9% in such a scenario.
With oil prices on the rise, a drop in West Texas Intermediate oil benchmark price similar to 2014, would see most of the funds gaining while the top 10 fixed-income/credit funds would see only a slight -0.06% drop.
In addition to high-level findings, the report takes deeper dives into the trends and factors impacting risk and returns for each of the four baskets of funds to provide even more insight into how funds might react and why.
To download a full copy of the report, please click here.