Hedges Funds Voting on the “Goldilocks Effect” — Evening Brief – 11.01.24
Hedge fund managers are scaling back on leverage following third-quarter gains as they are “prioritizing market fundamentals over politics”, according to PivotalPath. Its main industry-wide benchmark, the PivotalPath Composite Index, built on August’s narrow 0.3% rise by advancing 1.1% in September. That brought the industry’s year-to-date returns to 8.3% as of the end of the third quarter.
In its most recent Pivotal Point of View hedge fund update, the hedge fund research and intelligence provider stated that following September’s positive performance, managers are now weighing the “tangible benefits” of interest rate cuts and buoyant markets against the uncertainties and risks associated with the election.
Despite a rocky start to the month, each of PivotalPath’s primary hedge fund indices finished September in the black.
Event-driven hedge funds outperformed, achieving a 1.7% increase for the month, as managers persistently sought corporate liability management prospects with the maturation of loans. In other areas, stock diversification and volatility trading techniques both increased by 1.5%, while the equity sector index yielded a return of 1.3%. Global macro (1.1%) and credit (1%) achieved gains exceeding 1%, while multi-strategy (0.6%), managed futures (0.5%), and quantitative equity hedge funds (0.4%) also concluded September with positive returns.
Equity-focused hedge funds significantly outperform the broader industry year-to-date, with the sector index up 13% by the end of the third quarter, followed closely by systematic stock pickers at 12.9% and diversified equity funds at 11.1%. Event-driven (8.3%) and credit (8%) align with the overall industry returns year-to-date; however global macro (3.2%) and managed futures are underperforming in 2024.
“September, so often a cursed month for stocks, started true to historical form with a dip, before surging forward and adding to 2024’s growing roster of market-beating firsts,” PivotalPath explained. “The closing day of the month finished with a record S&P 500 close, teeing up the final quarter of a remarkable year for U.S. equity markets.”
Currently, hedge funds seem to be exercising caution, divesting from global equities at the end of September and increasing short positions. Research indicates that managers have reduced macro product positions, especially in ETFs, by selling long positions and increasing index shorts.
Looking ahead, data also suggests that hedge funds are also now scaling back leverage in the run-up to the U.S. presidential election. “The U.S. election cycle is competing with the tangible benefits of a global rate cutting cycle and markets that are still in rude health, meaning most managers will prioritize fundamentals over politics this year,” the report noted. Building on this point, Pivotalpath suggested most funds are voting for the “Goldilocks effect,” rather than for the policies of either candidate.
“This ongoing market confidence means there is unlikely to be a large sell-off ahead of the election. However, as we get closer to November 5, we are still likely to see managers taking down leverage as they look to dampen down political risk, while there may be a small amount of net selling as funds take profits and add to shorts in some more politically exposed sectors.”
PivotalPath tracks the performance of more than 2,800 institutionally relevant hedge funds, across approximately $3 trillion of industry assets, on behalf of over $340 billion in client hedge fund capital.