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Hedge funds fall into the red as volatility and variants halt nine-month rise

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Hedge funds’ nine-month consecutive run of positive returns has been halted, with managers ending last month in the red as market volatility and renewed uncertainty over the impact of coronavirus variants.

Hedge Fund Research’s main industry-wide benchmark, the HFR Fund Weighted Composite Index – which tracks the monthly returns of some 1400 single manager hedge funds across all strategy types – lost 0.60 per cent in July, its first down month since September 2020.

The dent means hedge funds have now returned 9.45 per cent gain since the start of 2021. Before last month, the industry’s January-to-June advance – a rise of some 10 per cent – had been its best first-half performance since 1999, according to HFR data.

HFR president Kenneth Heinz said: “Hedge funds navigated a volatile market environment in July with mixed performance across sub-strategies and narrow declines across broad-based indices as, despite strong corporate earnings, investors focused on increased uncertainty surrounding renewed focus on the spread of virus variants.”

Long/short equity hedge funds gave back 0.76 per cent during July, with year-to-date returns now standing at 11.12 per cent, HFR data shows. Sector-focused equity managers were hit hardest, with healthcare hedge funds losing 2.87 per cent for the month, and energy and basic materials-focused managers down 2.38 per cent. But while the former is up just 1.02 per cent for the year, the latter remains up more than 16 per cent YTD, the best overall performing equity sub-strategy in 2021.

On the upside, quantitative directional (1.67 per cent), multi-strategy (0.86 per cent), market neutral (0.70 per cent), and technology-focused hedge funds (0.35 per cent) were the only equity hedge funds that ended July in positive territory.

Elsewhere, event driven hedge funds – which often trade out-of-favour, deep value equities and have been looking to capitalise on growing M&A activity this year – lost 0.82 per cent in July. Year-to-date, HFR’s event driven index remains up 10.75 per cent.

Within the event driven sector, activist strategies were flat at 0.06 per cent, while credit arbitrage funds added 0.80. All other strategy types were down, with multi-strategy event driven funds losing 3.11 per cent, merger arbitrage falling 1.77 per cent, special situations managers down 0.94 per cent and distressed strategies slipping 0.34 per cent.

Global macro hedge funds suffered their second consecutive down month in July, dropping 0.10 per cent following June’s 0.96 per cent slide. In the seven-month period since the start of January, macro managers – which make bets on macroeconomic events using equities, fixed income, currencies, commodities and futures markets – are up 8.22 per cent.

Active trading (-1.95 per cent), currency (-1.56 per cent), commodity (-0.97 per cent), and discretionary thematic (-0.96 per cent) funds were all down in July, though multi-strategy (0.03 per cent) and systematic diversified managers (0.59 per cent) ended the month in the black, as equity, inflation, and economic reopening data heralded mixed performances.

Fixed income-based relative value strategies, which are sensitive to rate movements, lost 0.80 in July, and are up 5.69 per cent year-to-date, with asset-backed funds up 0.10 per cent and fixed income sovereign-focused managers rising 0.38 per cent, while multi-strategy funds fixed income strategies dipped 1.87 per cent, and yield alternatives lost 4.43 per cent.

Elsewhere, emerging markets hedge funds were also down in July to the tune of 0.24 per cent, but year-to-date they are up 9.60 per cent. The best performing EM sub-strategy last month was India-focused funds, which advanced 6.25 per cent, while those trading Latin America slumped 4.10 per cent.

“The evolving macroeconomic environment continues to be fluid with reflationary, expansionary trends subject to sharp reversals and falling rates and inflation expectations,” Heinz observed.

“Hedge funds remain tactically positioned for these shifts, with high realised equity market volatility, oscillating between record highs and sharp correction cycles within intra-month, or even shorter, market cycles.”

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