Observations:
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Following months of record-setting performance dispersion, May returned to historical norms. The PivotalPath Dispersion Indicator clocked in at 3.9% for our hedge fund composite index, still above the long-term average of 2.9% for January 2000 – December 2019, but within the realm.
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Earlier this month, we published a study titled A Tale of Two Months. As mentioned above, while dispersion and volatility declined in May, March and April saw unprecedented levels, both in financial markets and hedge fund performance. Those two months provide the perfect backdrop to study managers under vastly different market regimes: 43 trading days serve as a microcosm to understand, even predict, manager performance, based on a measurement of “quality.”
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PivotalPath’s Social Distance Winners and Losers Baskets were both up in May, +15.5% and +6.1%, respectively. However, YTD, over 100% separates the performance of Winners, +61.1%, from Losers, -45.9%, despite correlating by 0.8 as recently as YE 2019. Understanding managers’ views and positioning relative to these baskets will continue to explain performance in 2020.
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Healthcare has been a top-performing strategy, both in May (+4.5%) and YTD (+3.7%). At first glance, investors may attribute this outperformance to large-cap names like Moderna and Gilead, presumed leaders in the global race for a COVID-19 vaccine. We developed the PivotalPath COVID-19 Vaccine Developer Large-Cap Basket to delve deeper. While strong YTD performance in healthcare ETFs could be attributed to constituents of this basket, hedge fund managers largely view these stocks as priced to perfection, with already limited risk/reward tradeoffs. Instead, managers continue to find opportunities in uncorrelated, catalyst-driven investments, particularly small and mid-cap names. Please look out for our upcoming insight on this topic where we’ll dive into the data, along with insights sourced directly from healthcare managers.