Macro Rules the Day — Evening Brief – 05.17.24      

Macro hedge funds continued their winning streak in April, providing a fourth consecutive month of returns for investors as long/short equities and event-driven strategies struggled during the broader stock market decline.   

Hedge Fund Research (HFR) reported that macro managers gained 1.52% in April, outperforming other strategy types for the second consecutive month. In contrast, HFR’s main Fund Weighted Composite Index, a broad-based benchmark tracking 1,400 hedge funds across all strategy types, lost 0.61% for the month, bringing industry-wide year-to-date performance to 3.80%. 

“The performance of macro funds is both strong and impressive in that macro contains many of the industry’s largest, most capital-concentrated funds,” HFR president Kenneth Heinz said, noting the sector’s negative correlation with equity market declines.  

Riding the Macro Wave 

Macro’s advance was driven by strong gains in commodity-focused strategies (3.03%), discretionary themed funds (2.07%), and systematic diversified strategies (1.65%). The industry, which invests in macroeconomic and geopolitical trends through equities, bonds, currencies, and commodities, among other instruments, has now increased by 7.89% since the beginning of the year.   

Amid prolonged global turbulence and uncertainties around rates and inflation, macro’s positive optionality and volatility-positive positioning provides investors with “specialized participation in powerful gains, portfolio protection, and negative correlation in risk-off environments,” Heinz observed.  

“Macro represents an ideal portfolio allocation for institutions navigating these volatile and dynamic financial market conditions,” he added.  

While macro managers withstood the recent market volatility, long/short equity hedge funds lost 1.64% on average in April, bringing their year-to-date returns to 3.40%.   

Healthcare-focused hedge funds were the hardest hit, down 4.34% for the month, while tech equity managers were down 3%, quant directional equity hedge funds plummeted 2.85%, and fundamental value strategies fell 2.25%.   

Multi-strategy was down 1.14% and fundamental growth saw negative returns of 0.81% in April. Only energy equity hedge funds (2.06%) and equity neutral strategies (1.33%) closed the month on a positive note.   

Widening Gap 

Event-driven strategies, which bet on stock mispricings and other valuation anomalies caused by M&As, bankruptcies, takeovers, and other corporate events, performed even worse, falling 1.88% on the month.   

Activist hedge funds suffered an 8% decrease, bringing their year-to-date performance to -2.84%, while special situations fell 2.63% last month. Credit arbitrage funds were flat in April, with merger arbitrage, distressed situations, and multi-strategy all losing more than 1%. 

Fixed income-based relative value arbitrage strategies, which are more sensitive to interest rate fluctuations, gained 0.27% in April on rising predictions of continuing inflation and higher-for-longer rates.   

The data show that the first quarter’s overwhelming risk-on sentiment gave way to a strong risk-off mood amid continuing inflation, higher-for-longer rates, and geopolitical turmoil. As a result, the performance disparity between winners and losers increased in April. 

HFR reported that the top decile of hedge funds increased by 5.9%, while the bottom decile decreased by 8.4%, resulting in a 14.3% top-to-bottom dispersion in April, up from 11.3% in March. Overall, approximately half of the hedge funds tracked by HFR produced positive returns last month, a decrease from about 85% in March.