Hedge funds enjoy biggest first-quarter gains in 20 years, as event driven and equity strategies fuel returns

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Hedge funds have made their strongest first-quarter start in more than 20 years, gaining more than 6 per cent in the three-month period to the end of March, with returns powered by a mix of successful calls on deep value equities amid accelerated volatility, renewed economic optimism, and soaring cryptocurrencies.

Hedge Fund Research’s main Fund Weighed Composite Index, a global, equal-weighted benchmark of some 1400 single-manager hedge funds, advanced 6.08 per cent in Q1, following a 1.02 per cent gain in March. The March gain proved to be its sixth consecutive monthly rise, with Q1 its best opening quarter since 2000, and the index’s fifth-best opening quarter on record.

HFR president Kenneth Heinz (pictured) said deep value, event-driven equities, coupled with credit strategies – including traditional credit arbitrage exposures – and cryptocurrencies have helped fuel industry gains lately, as performance dispersion between winners and losers continues to narrow.

Overall, event driven hedge fund managers led the pack, gaining 1.85 per cent in March to put their first quarter return at 8.21 per cent. All sub-strategies within the event driven sector were up in March, with activist (2.99 per cent), multi-strategy (2.36 per cent), and special situations managers (2.26 per cent) the best performers. On a quarterly basis, special situations hedge funds have risen 10.36 per cent, with distressed funds up 8.76 per cent and multi-strategy managers rising more than 7 per cent.

Equity hedge funds gained 7.36 per cent in Q1, after rising 1.12 per cent in March. Quantitative directional strategies added more than 5 per cent last month, while energy and basic materials-focused strategies rose 2.56 per cent, putting them up almost 13 per cent for the quarter thanks to surging commodities markets earlier in the year. Fundamental value-based equity funds have risen more than 10 per cent since the start of the year, and gained close to 2 per cent in March, although sector specialist healthcare and technology hedge funds each lost some 2 per cent last month.

Macro hedge funds experienced a mixed month in March, though on a quarterly basis most sub-strategies remain in the black. Overall, these funds – which make bets on macroeconomic events through equities, fixed income, currencies, commodities, and futures markets - rose 3.83 per cent in Q1, with a 0.69 per cent March gain. Multi-strategy macro managers were last month’s best performers, rising 1.74 per cent. Active trading (1.54 per cent) and systematic diversified macro strategies (1.15 per cent) also advanced, but commodities, currencies and discretionary thematic funds each lost money in March.

March proved to be comparatively muted for relative value hedge funds, with each sub-strategy making gains albeit less than 1 per cent. Overall, the sector added 0.71 per cent in March, and is up 3.89 per cent since the start of 2021, with fixed income convertible arbitrage managers leading the way with a 4.85 per cent quarterly advance.

Elsewhere, the continued blockchain and cryptocurrency surge added to hedge fund returns throughout March, with both the HFR Blockchain Composite Index and HFR Cryptocurrency Index each soaring more than 23 per cent in March.

HFR noted the performance dispersion of the underlying index constituents narrowed in March, with the top decile of the HFR gaining an average of 8.6 per cent, while the bottom decile lost an average of 6.2 per cent for the month - a top-bottom dispersion of 14.8 per cent. By comparison, the top-bottom dispersion in February was 20.3 per cent, and January was 19.8 per cent.

Looking ahead, Heinz said those funds positioned to opportunistically navigate “powerful and potentially volatile” trends are likely to lead industry performance into the middle of the year.

“With many equity markets having reached record highs, hedge funds continue to tactically position for fluid macroeconomic and geopolitical developments, with potential for dislocations as a result of dynamic retail trading trends, evolving demand for digital assets, new virus variants and/or financial institution leverage,” he said.

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Hugh Leask
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Editor, Hedgeweek