Evening Brief – 01.18.24
Long/Short, Event-Driven Hedge Funds Shine
Hedge funds experienced a late surge at the end of 2023, with long/short equity and event-driven managers achieving double-digit yearly returns, as industry professionals look for additional possibilities in 2024 coming from value dislocation.
According to new Hedge Fund Research (HFR) data, hedge funds closed the year up 7.52% after two consecutive monthly gains, reversing a 4.14% annual loss in 2022.
HFR’s main Fund Weighted Composite Index, which tracks about 1,400 single manager hedge funds across all strategy types globally, added 2.58% in December, which followed a 2.63% rise in November.
The positive performance, driven by factors such as M&A activity and declining inflation and interest rates, reflects the diverse strategies employed by hedge funds.
HFR president Kenneth Heinz stated that the acceleration of favorable year-end trends has improved the forecast for hedge fund performance in 2024, pointing to higher nominal bond yields, the continuance of powerful AI-driven technological trends, and greater increase in M&A.
Long/short equity hedge funds, the industry’s largest and most well-established strategy type, ended the year up 10.44%, a sharp turnaround from a 10.13% loss in 2022.
Quantitative directional and fundamental value led equities hedge funds year-to-date, each up nearly 14%, while tech-focused managers gained 12.55% and fundamental growth strategies posted a 8.12% return.
Event-driven hedge funds performed even better last year, posting a 10.74% annual return, a significant improvement from a 4% annual loss in 2022. HFR reported that the sector’s 4.74% gain in December was its best monthly performance since November 2020.
The event-driven space, which focuses on out-of-favor, deep value stocks by trading on stock market inefficiencies and other valuation anomalies caused by M&As, bankruptcies, takeovers, and other corporate events, was primarily driven by activist, special situations, and credit arbitrage strategies.
Activist managers rose 9.21% in December, putting them up more than 20% for the year, while special situations hedge funds rose 13.78% after a 5.19% December gain. Credit arbitrage managers also achieved nearly a 5% monthly return, bringing their total annual gains to over 13%.
“Despite the year-end improvement, managers remain sensitive to heighted geopolitical risks associated with ongoing or potential military conflicts and the economic impacts of expansion of these, including increased potential for volatility and systemic dislocations, as well as supply chain disruptions,” noted Heinz.