Equity Hedge Led HF Gains in May — Evening Brief – 06.18.24

The HFRI Fund Weighted Composite Index rose 1.3% in May, led by directional equity hedge and event-driven strategies, with relative value arbitrage strategies contributing positively to offset a decrease in macro strategies, according to data provider Hedge Fund Research (HFR).

The HFRI Equity Hedge (Total) Index increased 2.5% for the month, reversing its April fall and marking the index’s fifth gain in the previous seven months, earning its highest monthly performance since February.

The HFR Cryptocurrency Index rose 13.6% in May, while the HFR Risk Parity Vol 15 Index increased 3%.

“Hedge funds posted strong gains in May, reversing April declines, with leadership from directional equity and credit strategies, as investors positioned for continued inflation, ECB and US Federal Reserve rate cuts, and an improving economic growth in H2 2024,” Kenneth J Heinz, President of HFR, said.

In May, performance dispersion decreased, with the top decile of the HFRI FWC constituents increasing by an average of 7.6% and the bottom decile decreasing by an average of 4.1%, resulting in an 11.7% top/bottom dispersion for the month, according to HFR.

In comparison, the top/bottom performance dispersion in April was 14.3%. The top decile of FWC constituents increased by 42.9% in the previous 12 months to May 2024, while the bottom decile decreased by 7.3%, resulting in a 50.2% top-bottom dispersion. Approximately 70% of hedge funds produced positive performance in May.

Equity hedge funds, which invest long and short across specialized sub-strategies, led the gains in May, fueled by advances in energy and technology. The HFRI Equity Hedge (Total) Index rose an anticipated 2.5% in the month, marking a 6.1% year-to-date return.

Event-driven strategies, which frequently focus on out-of-favor, deep value equities exposures and M&A speculation, rose in May, fueled by multi-strategy and distressed exposures. The HFRI Event-Driven (Total) Index rose 1.6% in the month.

Fixed income-based, interest rate-sensitive strategies also advanced in May as investors were positioned for interest rate cuts in the second half of the year despite persistent inflation. The HFRI Relative Value (Total) Index added an estimated 0.6% for the month, increasing its year-to-date return to 3.3%.

Macro strategies posted a mixed performance in May as interest rates and financial market volatility fell, and as investors were positioned for interest rate cuts in 2H24. The HFRI Macro (Total) Index fell -0.65% in May, the first monthly decline since November 2023.

“Uncorrelated macro hedge funds, the leading strategy area of performance over the first four months of the year, posted its first monthly decline since November as financial market volatility fell in May,” noted Heinz.

“Hedge funds have effectively positioned portfolios in a tactical sense for these highly fluid and uncertain situations, including not only military threats, but possibilities for supply chain disruptions, outright trade embargoes or halts, and destabilizing dislocations and volatility associated with banking and broader financial market operation.”