Summertime ...
And the livin' is easy?
Summertime And the livin' is easy Fish are jumpin' And the cotton, the cotton is high
Summertime. We won't lie; we've been sweating a lot lately. Not because of poor performance, though. In fact, there was a nice little trend in cotton. However, we aren't so sure about the fish. Remember the "no future for salmon futures discussion" when we attempted to diversify the breakfast table?
Officially, summer is now coming to an end in the northern hemisphere. In Germany, this is marked by the annual migration of Dutch RVs on the Autobahn, heading from the south to their wintering grounds in the north.
The Chinese, always more profound in naming dates within a year, call August 23rd "Limit of Heat." "Heaven and earth begin to withdraw" as the sun starts to reach a celestial longitude of 150°, usually occurring between August 23rd and September 7th.
Anyway, during one of our summer excursions to the Bavarian lakes, we wondered if there is a seasonal pattern in fund performance during the summer.
Our hypothesis: Discretionary managers' minds might either be on vacation or overheated, while their systematic counterparts are undoubtedly benefiting from their machines humming along nicely, regardless of the weather.
How could we test this hypothesis?
Fortunately, our friend Linus at NilssonHedge has an impressive Fund Database, including a wide range of CTAs and Global Macro funds, as well as Long/Short Equity Managers, Fixed Income Strategies, and Multi-Strategy hedge funds. There are both discretionary and systematic funds in the database. Needless to say, we at Takahē Capital report our performance there as well, and Linus was kind enough to provide us with the data.
The snapshot we took for this example consists of monthly data from January 1, 2000, until July 31, 2023. Since we want to make some speculative takeaways for ourselves, we took all 580 available systematic CTA strategies from 365 different managers and labeled them as the "Systematic" group.
The "Discretionary" group of managers will be represented by anything labeled discretionary in the database and not too far off thematically. Hence, we removed VC, PE, Crypto, Web3, and some other niche managers (it doesn't make a difference). We are left with 814 programs managed by 498 managers.
Lo and behold, here are the median returns for both groups per month.
Clearly, both discretionary and systematic managers show good performance at the end of the year and the beginning of the year, with Q4 being the strongest quarter for systematic managers overall. On the other hand, Q2 seems to be a good time for discretionary managers.
Summer in the northern hemisphere usually spans from the June solstice, between June 20th and June 22nd, until the September equinox, which occurs annually between September 21st and 24th. With a bit of creativity, we can therefore attribute the poor performance of systematic managers in June and October to spring and winter, respectively.
Discretionary managers actually show their best performance in July, which is a below-average month for systematic managers. While discretionary managers' performance decreases from that month onwards until October, systematic managers ramp up performance in August and continue until summer ends, confirming our hypothesis.
The final conclusion?
Summer is far from being a bad time to invest in hedge funds. However, given that winter performance is even stronger1, we admit that there might be additional factors to consider besides heatwaves in Europe.
Maybe Santa plays a role in this as well?
Reach out to us if you want to find out more about Takahē Capital.
Of course, we completely disregarded the location of the managers. We’re aware there’s a southern hemisphere.