Evening Brief – 08.11.23
Hedge funds started the second half of the year on an upward trajectory, with strong returns in long/short equities and event-driven strategies helping the sector retain its first-half momentum into July, while macro managers continued to rebound from their first quarter retreat.
The main Fund Weighted Composite (FWC) Index of Hedge Fund Research, an influential benchmark assessing the profits and losses of over 1,400 single-manager hedge funds across all strategy types, increased 1.51% last month, raising its year-to-date return to 4.96%.
HFR President Kenneth Heinz said event driven and equity-focused managers successfully capitalized on recent gains in tech, financials and M&A markets.
Long/short equity, the industry’s largest sub-strategy, is currently up .83%, after being up 2.03% in July, following a 3.06% gain in June. Within equities, tech-focused long/short managers gained 3.37% in July, bringing their year-to-date gain to more than 14%. Last month, quantitative directional funds gained 2.81%, while fundamental value equity strategies gained 2.72%.
Event-driven hedge funds, which trade stock mispricings, valuation anomalies, and catalysts originating from M&As, bankruptcies, takeovers, and other corporate events, gained 2.58% in July, bringing their return to 5.10% year-to-date. Among the event-driven sub-strategies, activist managers led the way with a 3.74% return in July, bringing their returns to more than 14% year-to-date.
Macro hedge funds, which use equities, bonds, currencies, commodities, and other instruments to trade macroeconomic and geopolitical trends, gained 0.47% in July, with commodities-focused managers posting the highest monthly gains, averaging 3.77%. Year to date, macro managers are down -0.36%, although they are showing indications of recouping losses after suffering significant losses during March’s banking upheaval.
Relative value hedge funds have now risen 3.42% since the start of 2023, aided by a modest July gain of 0.87%. Here, fixed income sovereign strategies generated the best returns on both a monthly (3.20%) and YTD (6.21%) basis.
Heinz highlighted that while all four major hedge fund strategies rose for the month, data reveal that July performance among macro hedge funds and fixed income relative value strategies was more modest.
Heinz noted that “Powerful technology and AI trends were complemented by a strong equity beta tailwind as banks recovered from the recent volatility while inflationary pressures eased, increasing expectations for a stronger than anticipated second half of 2023, including pricing in a near-term end of the interest rate raising cycle.”