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Macro and CTA funds fly high as market dislocations intensify

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Returns from systematic, trend-following, and currency-focused macro fund managers have surged again in recent weeks as the escalating volatility in global bond, currency, and equity markets has intensified yet further.

With the dollar strengthening dramatically and US equities falling sharply amid increasingly aggressive Fed rate-tightening in a bid to tame inflation, and the UK pound and government bonds tumbling on the back of the government’s calamitous ‘mini-budget’, CTAs and other macro hedge funds have generated some eye-catching performance.

Hedge fund research firm HFR’s HFRI 500 Macro Systematic Diversified Index soared by 4.4 per cent in September, while the investable HFRI Macro Index was up by 2.75 per cent on the month to take its year-to-date performance after the first three quarters to 17.45 per cent.

To the end of September, the HFRI 500 Macro Commodity Index is up by 43.9 per cent – while the HFRI Macro Systematic Diversified Index is up by 22.7 per cent to the end of Q3.

“Financial market volatility accelerated in September, with the additional catalyst of dislocations in the currency markets adding to continued equity market declines, rising interest rates, and generational inflation,” said Kenneth Heinz, president of HFR. 

“Through the first three quarters of 2022, macro hedge funds opportunistically navigated the volatility surge to extend record outperformance of equity markets, while the overall hedge fund industry produced the strongest outperformance of equity markets in 20 years.” 

Figures from other index providers – such as Société Générale, a leading prime broker to CTAs – underline the dramatic gains made by systematic trend-following funds this year. The SG CTA Index is up by 27.74 per cent for the year, while the SG Trend Index is showing a gain of 36.99 per cent.

“Currency-focused and quantitative, trend-following CTA strategies led performance as interest rates increased and the US dollar surged against the euro, yen and sterling,” said Heinz. “Macroeconomic and geopolitical risks continue to accelerate into year-end and are expected to drive extreme volatility and the potential for destabilising dislocations.” 

While CTA and macro funds have thrived amid the escalating volatility, other hedge fund strategies have suffered. The HFRI Equity Hedge Index fell by more than 4 per cent in September and is now down by almost 14 per cent for the year.

Overall the HFRI Fund Weighted Composite Index is down by just over 6 per cent for the year – although the strong outperformance this year by larger hedge funds is reflected in the fact that the HFRI Asset Weighted Composite Index, which is biased towards big funds, is up by almost 4 per cent to the end of Q3.

According to HFR, the extreme dispersion of hedge fund performance so far this year widened in September, as the top decile of the HFRI constituents advanced by an average of +6.4 per cent, while the bottom decile fell by an average of -14.3 per cent, representing a top/bottom dispersion of 20.7 percent

Through the first nine months of the year, the top decile of the HFRI has gained an average of +38.0 per cent, while the bottom decile has declined by an average of -35.3 per cent, giving a dispersion of 73.3 per cent. 

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