Performance dispersion among hedge funds has narrowed in recent weeks, as almost 60% of managers generated profits in July – with long/short equity, event driven and relative value strategies all making gains, according to new industry data.
• Hedge funds claw back gains in July following torrid first half
• New data shows first-half gap between winners and losers is narrowing, as almost two-thirds of managers generated positive returns last month
• Hedgeweek survey shows managers are bullish on H2 prospects amid continued market instability
Performance dispersion among hedge funds has narrowed in recent weeks, as almost 60% of managers generated profits in July – with long/short equity, event driven and relative value strategies all making gains, according to new industry data.
Last month’s rise – which averages some 1.65% across all hedge fund sub-strategies, according to performance metrics published by Hedge Fund Research – comes as the industry looks to bounce back from a tricky first half of 2022.
Hedgeweek’s latest Insight Report, H1 Update: Hedge funds traverse 2022’s economic turmoil, which examines the key themes and trends driving first-half performances, suggests managers are optimistic on their second-half prospects, as recession fears and a sustained surge in inflation continues to spook markets and investors.
The July gains halt three consecutive months of losses in HFR’s main benchmark, the Fund Weighted Composite Index, which tracks the monthly returns of some 1400 single manager hedge funds across all strategy types.
But despite the rise – which was the first positive month for the HFR index since March this year, when it was up 1.23% – hedge funds remain down more than 4% for the year.
The dispersion of hedge fund performance narrowed in July, as the top decile of the HFR constituents gained 9.9% on average, while the bottom decile slipped 5.8% – a top-to-bottom dispersion of 15.7%, which has narrowed from 26.8% the previous month.
Long/short equity strategies on average scored a 2.89% gain during July, as the S&P 500 rebounded some 9.1 per cent last month following its worst H1 performance in 50 years. Leading the equity pack in July were energy-focused strategies, which were up 4.78%, and quant directional funds, which added 3.94%. Still, equity-based hedge fund strategies remain the worst performing category this year, having lost 9.2% over the seven-month period, according to HFR data.
On the flipside, macro hedge funds, which have profited from this year’s market upheaval, slumped 1.07% in July, their biggest monthly fall this year. Macro managers – which trade geopolitical and macroeconomic events using equities, currencies, commodities, futures and more – remain up 7.36% year-to-date, according to HFR research.
Elsewhere, event driven hedge funds – which trade stock mispricings and other valuation anomalies stemming from mergers and acquisitions, bankruptcies, takeovers and other corporate events – added more than 3% last month, powered mainly by a stellar 6.84% July gain for activist-focused managers. Event driven funds overall remain 4.56% in the red YTD, however. Relative value funds advanced 1.13% in July, but remain down 1.02% for the year.
As the industry looks to build on July’s upturn, hedge funds are confident in their ability to identify opportunities in 2022 amid continued market upheaval. Research conducted by Hedgeweek shows 71% of managers are positive on their H2 performance prospects.
HFR president Kenneth Heinz noted how managers are now navigating “rapidly evolving, dynamic and volatile market cycles” across equity, fixed income, currency and commodity markets, driven by “global inflationary pressures, uncertain military conflict scenarios and instability in energy markets and supply chains.”
Heinz said: “Managers are effectively positioned for both defensive capital preservation and portfolio protection, as well as opportunistic and favourable shifts in the current market paradigm.”
Key Implication | Hedge fund managers & investors: After the industry delivered mixed returns in the first half of 2022, hedge fund managers – the majority of whom are upbeat on H2 prospects – as well as investors will be hoping that July’s gains mark the start of a broader fightback, as volatile markets and a looming recession offer challenges as well as opportunities.
