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Hedge funds show their worth in February as they outperform volatile S&P 500

Hedge funds outperformed the S&P 500 in February for just the third time in the past 12 months as the industry navigated the coronavirus sell-off more effectively than passive investors.

The global hedge funds industry posted aggregate losses of 2.53% in February, according to eVestment, an institutional investment data provider owned by Nasdaq, compared with returns including dividends of -8.23% for the S&P 500, -3.73% for a balanced index of global equities and sovereign bonds (50% MSCI World/50% Citi WGBI).

The other two occasions that hedge funds outperformed the S&P 500 over the past year were in August 2019 and May 2019, the only other two negative months for the U.S. benchmark during the period.

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Outperforming the balanced index is more common. That occurred five times in 2019 and six in 2018, according to eVestment Head of Research Peter Laurelli.

"The issue has generally been that funds have not captured the upside in the best of periods as much as they’ve participated in the downside during the worst of periods," said Laurelli. "Over time, this has been the cause of aggregate average underperformance of prominent benchmarks."

In 2019, the hedge fund aggregate benchmark returned 9.89% compared with 31.49% for the S&P 500 and 16.57% for the MSCI World/Citi WGBI benchmark.

China-focused funds were the best performers in February, posting gains of 2.85%, according to eVestment. Currency managers posted a 1.22% gain, while at the other end of the scale funds with event-driven and activist strategies suffered an 8.17% decline.

Overall, returns were mixed, with a handful of the industry’s most notable funds producing the highest losses in several years, while a smaller segment produced similarly outsized gains.

Bridgewater Associates' Pure Alpha Fund II lost 4.6% in February to leave it 8% lower in 2020 before dropping a further 13% through March 12, the Financial Times reported as the world's biggest hedge fund manager failed to navigate the market turmoil.

Investors allocated $10.38 billion to hedge funds in January, eVestment data showed. The monthly win-rate the proportion of funds gaining new assets for the industry was 52% during February, above the near 47% monthly average since January 2016, it said.

Credit strategies had the highest win-rate at 63%, while flows into equities were more concentrated, at 48%.