August was a tough month for hedge funds, with many big-name activist investors like Dan Loeb, David Einhorn, and Bill Ackman taking a hit. However, hedge funds for these individuals and as a whole are poised to make a comeback—particularly those using computer-based investment planning. And as of late August/early September, hedge funds are already on the rebound.
The trouble started with market swings in August. That’s when some of the most volatile market activity since the 2008 financial crisis occurred.
“I would say that August was an unusual month for the hedge fund industry because you had very large dispersions of returns across various hedge strategies,” said Don Steinbrugge, managing partner of the Agecroft Partners, a marketing and consulting firm for the hedge fund industry.
Because hedge funds are often focused on long-term gains, short-term losses can hit them quite hard, especially in a wildly fluctuating market.
However, it wasn’t all doom and gloom last month. The average hedge fund was only down 2.2%, as opposed to the S&P, which was down 6.2%. And since the beginning of September, hedge funds have shown every indication of improving across the board.
In particular, hedge funds using computerized data are coming out ahead. According to a J.P. Morgan study, even though equity indexes around the world were low in August due to fears about China’s growth stalling, hedge funds using computer programs to generate income from long-term macro trends actually gained about 1%. These programs allowed the hedge funds using them to anticipate the massive sell-off so that they could sell equities before the market downturn.
Since then, hedge funds as a whole have continued to improve. The Lyxor Hedge Fund Index was up 0.4% last week (it was down 3.3% in August). And though further volatility can be expected, overall hedge funds are predicted to outperform traditional assets.