We found that Chinese Long Short Equity hedge funds have substantially outperformed the American equivalents.
Market globally had a year of extreme volatility in 2020 due to the ongoing pandemic. According to the World Economic Outlook report by IMF in Jan 2021, the overall world output fell by 3.5%. China was the only country with a positive growth of 2.3%, while the United States fell by -3.4%. United States and China constitute 40% of the world’s GDP.
We selected Hedge Funds with AUM greater than $10 Million, with an investment geography focus in China and United States. 59 funds from China and 210 funds from the United States got selected for the analysis on which a weighted index was created based on the hedge funds’ AUM.
Graph 1 shows that Chinese Long/Short Equity Hedge funds outperformed American hedge funds. The funds focusing on the United States had negative cumulative returns throughout 2020 reaching only a positive return of only +1.46% by the end of the year.
Graph 1: 2020 Performance of American and Chinese Long/Short Hedge funds
Sources: HFR and Eurekahedge
According to us, the negative performance of the US L/S Equity funds is down to two main factors. The first is that S&P 500 has substantially underperformed the Chinese Index S&P GXC in 2020 (16.84% vs 24.26% respectively).
Secondly, US Equity L/S HFs have been able to only capture only a small part of S&P500 rebound between April 2020 and December 2020 (17.16% of the L/S funds vs. 45.33% of S&P500); this is highlighted by the low beta to the index during this period (0.44). On the contrary, Chinese L/S HFs have been able to match the rebound of GXC (40.15% of the L/S funds vs 44.35% of GXC), reflected in a higher beta during this period (0.74).
In conclusion, the Long/Short Equity hedge funds with a geographic focus on China greatly outperformed funds that had a geographic focus on the U.S. In terms of cumulative returns, Chinese-based funds were at 37.46% in December while U.S. funds were only at 1.46%.
N.B. This article does not constitute any professional investment advice or recommendations to buy, sell, or hold any investments or investment products of any kind, and should be treated as more of an illustrative piece for educational purposes.
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