April could be described as the month of the “pain trade” for some investors, as many assets began to move in the opposite direction of long-established trends that drew in crowds of traders.
The euro rallied 4.6 percent versus the dollar in April after slumping for nine consecutive months, crude oil jumped 25 percent after falling to a six-year low, German bund yields reversed course after approaching zero, etc. Heck, even the New York Mets started winning.
However, for the largest class of hedge fund strategies, where the previous five years could pretty much be described as one long pain trade, it was a pretty good month. Global long/short equity funds rose 2.4 percent in April and 5.7 percent in the first four months of the year, net of fees, according to data from Eurekahedge Pte.
That was the best performance among 10 strategies tracked in the report. By comparison, the year-to-date return for the Standard & Poor’s 500 Index was 1.9 percent and the MSCI All-Country World Index ’s was less than 5.5 percent through the end of April.
It was a good month to show some outperformance. Long-short equity funds, which had experienced only one month of positive investment flows since August 2014, attracted $3.2 billion in new money during April, the most among the 10 strategies tracked in the report. The fresh funds and returns pushed assets in the strategy to $751 billion, within spitting distance of what Eurekahedge calls the “historic high” of $756 billion reached in December 2007.
December 2007 turned out to be a pretty good time to be in a fund making short bets. The Eurekahedge Long/Short Equities Hedge Fund Index fell about half as much as the S&P 500 in 2008 and even outperformed in 2009 during the rebound. The bursting of the dot-com bubble was even better. The index gained an average of 10 percent per year in 2000-2002, while the S&P 500 lost an average of more than 14 percent (including dividends) in each of those three years.
The outperformance didn’t last, and the S&P 500 beat the long-short index pretty handily in each of the last five years. Outflows worsened as, in the words of Eurekahedge, “investors’ interest in the strategy waned after an extended market bull run.”
So could the recent performance and inflows into long/short funds be a sign that investors believe the bull is finally tiring out after a 2,261 days on the run? As Goldman Sachs Group Inc. strategist David Kostin wrote last month, clients have been on the hunt for short trade ideas amid equity valuations that by some metrics are higher than any time in the past four decades excluding the technology bubble.
Then again, U.S. and global stock indexes are sitting right around record highs even after the wild moves in other assets in April and early May. So it’s obviously too early to write the bull market’s obituary.
Unless, of course, you’re Leuthold Group LLC chief investment officer Doug Ramsey, then you literally prepare the obit early just in case. The ultimate cause of death, according to Ramsey, will be related to over-enthusiasm from investors despite the bull market’s reputation for being hated. The symptoms, Ramsey asserts, include surveys showing high levels of confidence among consumers and bullishness among market watchers, as well as the popularity of passive equity strategies late in the cycle.
“In an ironic twist, the bull’s inability to acknowledge his own popularity would ultimately spell his demise,” Ramsey wrote. “He died an untimely death in late 2015, just short of the age of seven.”
This obituary has been written before, but extra points for the ironic twist.