The next time you encounter a hedge fund manager blaming central bankers for their performance woes, resist the urge to roll your eyes: They just might have a point.
A new study delivers some of the strongest evidence yet directly connecting the malaise of the fast-money investor with monetary efforts to fend off economic disaster.
Alexei Orlov of the U.S. Securities and Exchange Commission and Massimo Guidolin of the Bocconi University in Italy tested 10 investing strategies against 18 unconventional monetary policy announcements from the Federal Reserve and European Central Bank between 2008 and 2016.
The result: They found monetary policies are directly hitting more than half of the strategies, and indirectly whiplashing virtually the entire industry.
“The aim is to test whether -- and how (i.e. positively or negatively) -- each hedge fund index is exposed to monetary policy shocks,” Orlov and Guidolin wrote in the introduction to their paper.
The findings showed “the UMP announcements represent a risk factor that leads to negative, precisely estimated exposures” for six of the 10 strategies, they said. Those affected comprise convertible arbitrage, dedicated short bias, emerging markets, equity market neutral, fixed-income arbitrage and multi-strategy.
Global macro, equity long/short, managed futures and event driven strategies managed to avoid that list. But investors may want to pause before shuffling any cash around -- when the researchers looked at the indirect effects of policy pronouncements, it transpired there was virtually nowhere to hide.
The industry is continuing to endure a miserable spell this year, with everything from overcrowding to Covid-19 hurting returns and shuttering funds.
Orlov and Guidolin found “breaks” in the conventional characteristics that help determine the return of each strategy, known as factors, which corresponded to the UMP dates. That’s a tell-tale sign that Fed and ECB announcements are having such a large impact on the market as a whole it disrupts the foundations upon which hedge fund returns are built.
“Not only do we find that each of the 10 strategies and the industry as a whole feature a number of structural change episodes in risk exposures, but we also find that most of the endogenously determined break dates match, or nearly match, the UMP announcement dates,” they wrote.
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