Highlights:
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While the first quarter of the year has seen higher than average performance dispersion across strategies, it is nothing like what we saw this time last year, when the PivotalPath Dispersion Indicator registered an all-time high of 11.7%. Across strategies, 18% of managers have already returned double-digits, with the top fund up 67% YTD. On the flip side, thus far 4% of managers are down double-digits in 2021.
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The PivotalPath Equity Sector Index houses investment sub-strategies including Healthcare, TMT, Financials and Energy. Over the last few years, Healthcare and TMT vastly outperformed Financials and Energy. However, the US 10-year Treasury yield’s rise from 1.4% to 1.74% in March triggered a rotation from growth to value/cyclicals. The result? Financials (+3.8%) and Energy (+3.2%) placed in the top quartile of monthly sub-strategy performance, while Healthcare (-3.3%) and TMT (-4.4%) ranked at the absolute bottom.
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Additionally, on the topic of interest rates and Equity Sector managers, our Research team is conducting a systematic analysis of sector sub-strategy performance during different interest rate regimes. Preliminary results indicate that Energy and Financials (the value/cyclical sectors) perform best when rates were high whereas Healthcare and TMT (the growth sectors) perform best when rates were low. The one condition where growth sectors perform even better than they do during periods of low rates is when rates move up quickly and dramatically, resulting in significant outperformance by both Healthcare and TMT. Two such examples of this phenomenon are after the Global Financial Crisis in ’09 and the Taper Tantrum in ‘13. Hedge fund investors with a perspective on rates may want to tilt their Equity Sector allocations accordingly. Stay tuned for the full results of our analysis later this month!
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The hedge fund industry performs better than many close observers even realize, and it has for years. While GameStop and Reddit distract, institutional investors such as pensions, endowments and foundations could invest with funds returning over 11% in 2020 with less than half the volatility of the S&P 500, while generating almost 4% of alpha. As a recent Federal Reserve working paper reveals, new research regarding risk-adjusted, differentiated performance should lead to increased hedge fund allocations given the existing headwinds institutional investors face in achieving stated performance objectives.