Hedge funds traverse volatility and inflation trends with biggest Jan-to-May returns in 25 years

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Upwards trends

Hedge funds are stacking up gains this year as shuttered economies continue to unlock, with the industry navigating volatility and inflation to score its best January-to-May performance in two-and-a-half decades. 

Hedge Fund Research’s main Fund Weighted Composite index – which tracks the investment performance of more than 1400 single-manager hedge funds across all strategy types – grew 1.7 per cent in May.  

That rise – which brought year-to-date returns up to the end of May to almost 10 per cent – was the eighth successive monthly gain for the index. In the trailing eight-month period, the FWC grouping surged 21.9 per cent, the third strongest such period on record. 

It was also the biggest January-to-May advance since 1996, when the benchmark gained more than 12 per cent over the same five-month period. 

The across-the-board gains for strategies of all stripes and sizes comes despite rising volatility in stock markets and increased inflationary pressures, said HFR president Kenneth Heinz. Managers are currently navigating this environment with an emphasis and focus on inflation/interest rate sensitivity and equity volatility management. 

Equity hedge funds’ overall performance has edged into double-digit territory on a year-to-date basis, with May’s 1.48 per cent gain putting the sector up 11.26 per cent in 2021. Energy and commodities-focused managers led the way, with successful oil market calls bringing monthly gains of some 3 per cent, and year-to-date returns up more than 18 per cent. 

Multi-strategy, fundamental growth and fundamental value equity hedge funds were also up or around the 2 per cent mark for the month. But tech and healthcare hedge funds each tumbled more than 1 per cent in May, though they both remain in positive territory for the year so far. 

Event driven hedge funds have also successfully capitalised on the evolving M&A, special situations and restructuring landscape. These managers have advanced 11.77 per cent since the start of January, and climbed 1.63 per cent last month. 

Here, activist strategies climbed 2.61 per cent last month, soaring 14.27 per cent year-to-date. Similarly, hedge funds that trade distressed and restructuring opportunities generated a 2.52 per cent return in May, and are now up 13.28 per cent for the year. Similarly, special situations funds have risen a stellar 14.63 per cent over the five-month period, having added more than 2 per cent in May. Merger arbitrage funds gained 1.51 per cent last month, pushing YTD gains to more than 9 per cent. Only credit arbitrage strategies stumbled in May, suffering losses of more than 4 per cent. Still, the sub-strategy remains up 2.52 per cent since the start of 2021. 

Macro hedge funds added 2.31 per cent last month, which brought their five-month performance to more than 9 per cent. Discretionary thematic managers topped the macro chart in May with a 3.71 per cent rise, which put their year-to-date showing to 9.43 per cent. Commodities-focused macro strategies have generated an 11.23 per cent return since the start of the year, aided by May’s 2.13 per cent rise. Elsewhere, multi-strategy and systematic diversified funds also grew by more than 2 per cent last month, and have now risen by more than 10 per cent and 9 per cent, respectively. 

Relative value-focused managers saw more muted returns in May, though each sub-strategy finished the month in positive territory. Volatility-focused funds gained 1.15 per cent for the month to put them up 2.52 per cent year-to-date. The rest of the sector’s returns were under 1 per cent. Year-to-date, multi-strategy relative value funds have advanced 6.58 per cent, fixed income corporate has gained 5.87 per cent, and asset backed and convertible arbitrages strategies have each added more than 4 per cent. 

“Hedge funds have effectively transitioned exposures and positioning globally for a post-pandemic macroeconomic and geopolitical environment, encompassing both ongoing risks associated with virus variant and mutations, as well as evolving opportunities associated with a robust reopening across global and regional economies in coming months,” Heinz added. 

May’s metrics also show a contraction in performance dispersion between winners and losers. The top decile of the HFR index gained an average of 8.7 per cent, while the bottom decile declined by an average of 3.1 per cent for the month, representing a top-bottom dispersion of 11.8 per cent. By comparison, the top-bottom dispersion in the first four months of the year averaged 17 per cent.