Hedge funds have not had the best of times in recent years. In 2018, the equities market rout hit the asset class hard and now the emergence of COVID-19 is showing its impact.

In Q1 of 2020, the S&P 500 index was down 20 percent. With hedge funds having to navigate volatile prices in equity, debt, and commodity markets, how have returns fared? Which top-level strategies, if any, were able to make gains in the quarter?

Information from Preqin shows that return generation was especially challenging in Q1 2020. Hedge funds lost 10.46 percent in Q1 2020, almost erasing the annual gain in 2019 of 10.97 percent. Performance in March was the key driver: hedge funds returned minus 8.96 percent for the month. To put this into perspective, the March 2020 return was a larger loss than those recorded at the height of the Global Financial Crisis in September (-6.66 percent) and October (-8.10 percent) 2008

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Strategies highly correlated to public equity markets were unsurprisingly most affected by the losses seen in public markets. The loss of 17.27 percent recorded by event driven strategies was the lowest return among top-level strategies, and equity strategies (-15.06 percent) were only just ahead

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However, CTAs provided some black in a quarter of red, though. With a quarterly return of 2.79%, CTAs were the only top-level strategy to make gains in Q1 2020. In the 2020 Preqin Global Hedge Fund Report, published at the start of the year, the firm predicted that investors were likely to look toward non-correlated strategies such as CTAs in anticipation of changing market dynamics.

The number of new hedge funds launched has been understandably low so far this year. Just 87 funds were launched in Q1 2020, and while this is an increase from 79 launches in Q4 2019, it is down by two-thirds compared with Q1 of last year (235). Equity strategies funds saw their share of total launches drop from Q4 2019, while the proportion of macro strategies fund launches increased from 8% in the previous quarter to 10% in Q1 2020.

Amid the economic uncertainty and market disruption created by the COVID-19 pandemic, defensive hedge fund strategies have so far provided diversification from public equity losses. Market participants will now be looking to navigate through this challenging period – however long it may last – or even position themselves for a potential rebound.