In January and February, strategies with a lot of beta, exposure to the equity and fixed income markets, such as activists, long/short equity, and distressed debt, generated very poor performance, which was significantly worse than most investors’ expectations. Investors do not mind if these strategies underperform during a bull market, but they are expected to reduce downside volatility during periods when the market sells off. Fortunately, these strategies rebounded significantly during the month of March and only finished the quarter slightly down. Nonetheless, investors remain disappointed that these strategies did not provide the downside protection they expected.

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Strategies that are uncorrelated to the capital markets performed very differently. For example many direct lending and reinsurance managers posted positive returns in each of the first three months. Market neutral and relative value fixed income managers generally exhibited significantly less volatility than high beta oriented strategies. CTAs, although volatile, enhanced a diversified portfolio’s Sharpe Ratio by being negatively correlated during the quarter; they were up in January and February and then gave back some of the gains in March when other strategies rallied.

What is also not apparent when looking at the quarter’s performance is the huge dispersion of returns exhibited by managers within each strategy. In many cases there was over a 20% differential in returns between the best and worst performers within a single strategy. When strategies underperform investors’ expectations and when dispersion of returns between managers increases significantly, it results in a significant increase in fund redemptions, especially for those managers that underperformed.

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