Evening Brief – 12.15.23
Hedge Fund Winners and Losers
Hedge funds returned more than 2% to investors in November, the industry’s best month since January, as managers gained from correct calls on rallying equities, declining bond yields, a pick-up in mergers and acquisitions, and growing expectations that interest rate hikes had reached their peak.
The main Fund Weighted Composite Index from Hedge Fund Research gained 2.17% in November, its first positive return since July and its largest gain since the 2.66% gain in January. The industry benchmark, which measures over 1,400 single manager hedge funds across all strategy types, is now up 4.35% entering the closing weeks of 2023.
About 70% of all hedge funds achieved positive returns in November, according to HFR, but the performance gap between winners and losers has expanded as the year draws to a close.
Directional equity and event-driven managers fueled November’s advance, noted HFR president Kenneth Heinz, as a “powerful risk-on sentiment dominated financial markets driven by an unexpected decline in inflation, falling bond yields, an uptick in M&A, and broad-based equity market gains.”
The equity market advance in November provided extensive gains to stock picking hedge funds, with long/short equity strategies gaining 4.13% on average, pushing their year-to-date return to over 6.30%.
When it comes to quantitative directional managers, they led the way with a 7.19% monthly increase, bringing their year-to-date returns to more than 11%. Fundamental value, healthcare, and tech-focused equities managers all gained more than 4% in the month.
More positive news came from the event-driven hedge fund industry, which trades on stock mispricings and other valuation anomalies caused by M&As, bankruptcies, takeovers, and other business events. Managers in this sub-strategy added 3.6% in November and are currently the top performing hedge fund sub-strategy year to date, up 6.40% since the beginning of January.
Meanwhile, macro hedge funds lost 1.59% in November, their second straight month of losses. Managers have lost 1.83% since the beginning of January, highlighted by geopolitical volatility and macroeconomic uncertainty.
Even though much of the sector fell into the red in November, discretionary themed macro strategies gained 1.53%, while active trading macro funds gained 1.19%, bringing their year-to-date gains to 6.51%.
The top decile of the HFR’s Fund Weighted Composite components gained an average of 12.9% in November, while the bottom decile lost 6.5% – a top-to-bottom gap of 19.4% for the month.
Heinz believes the industry is now in a good position to capitalize on a stronger economic outlook in 2024, citing declining bond yields, continued AI-driven tech trends, and the possibility of interest rate cuts.