Nick Evans writes that equity hedge funds started the second half of 2022 with a much-needed bounce in July, as the strong US stockmarket rally after the worst first half of a year on Wall Street in more than half a century helped long/short equity managers to claw back some of their H1 losses.
Global hedge fund research firm HFR said its investable HFRI 500 Fund Weighted Composite Index rose by 1.3 per cent in July to cut its loss for the year to -2.7 percent – with the gains being driven by a recovery in equity hedge and event-driven strategies, which had generally suffered steep declines in the market sell-offs earlier in the year.
The HFRI 500 Equity Hedge Index rose by 3.25 per cent on the month, against a 9 per cent rise in the S&P 500 index in July, to cut its loss for the year to -9.6 per cent. Underlining the unexpected nature of the stockmarket upswing – which many attributed at least in part to short-covering – the top-performing equity hedge sub-strategies in the month were the Technology Index (up 5 per cent) and the Fundamental Growth Index (up 4.4 per cent).
Event-driven strategies – which focus on out-of-favour, deep value equity positions and speculation on M&A situations – also recovered some lost ground in July, with gains for event-driven, activist, and multi-strategy managers ranging from 3 to 4.5 per cent.
However, macro and systematic CTA strategies – which had delivered impressive returns for investors amidst the market turmoil in the first half of the year – slipped back a little in July, with an overall loss of -1.5 per cent on the month trimming the year-to-date gain for the HFRI 500 Macro Index to 11.9 per cent.
“Led by high-beta strategies, hedge funds posted the strongest gains in 15 months, as powerful risk-on sentiment drove a sharp reversal in equity markets, while the US economy entered a recession and the US Federal Reserve raised interest rates again in an effort to slow generational inflation,” said HFR president Kenneth Heinz.
“Despite the July equity market recovery, macroeconomic and geopolitical risks remain elevated, with managers effectively navigating rapidly evolving, dynamic and volatile market cycles across equity, fixed income, currency and commodity exposures, driven by global inflationary pressures, uncertain military conflict scenarios, and instability in energy markets and supply chains.”
July provided some much-needed respite for equity-focused hedge funds after a bad end to the first half of 2022 in June – with a -2.6 monthly fall in the HFRI Fund Weighted Composite Index representing its largest decline since March 2020, and with equity hedge funds racking up an aggregate loss of more than -12 per cent in the first six months.
But the performance of equity hedge funds compared favourably with first-half falls of over 20 per cent and 30 per cent for the S&P and Nasdaq indices – while HFR pointed out that the overall -5.9 per cent H1 loss of the HFRI Fund Weighted Composite Index represented the largest outperformance ever of the two US equity market indices in the first half of a calendar year, at 16 per cent and 25.5 per cent respectively.
Macro and CTA funds were the stars in H1 – with first-half gains of 13 per cent for the overall HFR Macro Index, 18 per cent for the Macro: Systematic Diversified Index and 37 per cent for the Macro: Commodity Index.
Despite the relative outperformance by hedge funds so far this year, HFR analysis shows that institutional investors withdrew an estimated USD27.5 billion from hedge funds in the second quarter – the highest quarterly outflow since Q1 2020 – to take total global hedge fund industry capital to USD3.8 trillion as at the end of June.
Performance gains and net asset inflows into macro and CTA strategies were more than offset by performance-based losses and investor outflows from equity hedge strategies – which experienced net redemptions of USD18.5 billion in the second quarter, according to the firm.
“Navigating extreme volatility, generational inflation, sharp interest rate increases, a historic breakdown in correlations, an increased likelihood of recession and the worst 1H equity market decline in over 50 years, macro and relative value arbitrage hedge funds drove historic defensive capital preservation and the largest opportunistic equity and fixed income outperformance since inception of HFR indices in 1990,” said Heinz in July.
“Given the acceleration of macroeconomic and geopolitical uncertainty, institutional investors are likely to increase their commitment to funds combining effective, volatility-positive, capital preservation with managers offering opportunistic exposure to interest rate and inflation trends. Funds tactically positioned to navigate these multi-asset trends are likely to lead industry performance and growth through 2H22.”
