Hedge funds gained in December to conclude a volatile year, navigating election and geopolitical risks, falling but persistent inflation, and surging cryptocurrency prices, with macro and arbitrage strategies leading the way, according to the latest data from HFR.
Strategy-level performance was mixed in December following the November surge, as managers and investors continued to position for an active M&A cycle and more business-friendly policies from the incoming US Presidential administration, while also anticipating continued inflationary pressure and fewer rate cuts from the US Federal Reserve than some investors had expected.
New hedge fund launches rose while liquidations declined sharply heading into Q4 2024, as investors positioned for an evolution of the geopolitical and economic risks which had defined 2024. The estimated number of new funds launched in Q3 2024 increased to 118, up slightly from the prior quarter estimated launch total of 111, while liquidations in Q3 posted a sharp decline to only an estimated 82 closures, the lowest quarterly liquidation total since Q2 2006 according to HFR. As previously reported, total hedge fund industry capital reached another record level heading into Q4, beginning the quarter at an estimated $4.46tn.
New fund launches continue to exhibit industry strength and investor demand, with the estimated YTD total of 375 launches over the first three quarters of 2024 topping same period year over year. Liquidations also fell over the same period last year, with 326 funds closing, below the estimated 311 liquidations over same period last year.
The HFRI Asset Weighted Composite Index gained +0.8% in December while the HFRI Fund Weighted Composite Index (FWC) declined -0.2% for the month. Strategy gains were led by uncorrelated macro and relative value arbitrage strategies, while directional equity hedge and event driven exposures declined, with each of these paring strong annual gains and the strongest single monthly return for 2024 in November.
The HFR Cryptocurrency Index fell -2.4% in December after gaining +35.7% in November on the favourable outlook for cryptocurrency by the incoming Trump administration, ending the volatile year with a +59.8% return. The recently launched HFRI Multi-Manager/Pod Shop Index was essentially flat for December, adding +0.01% for the month as managers navigated a pullback from strong election-related gains in November. Multi-manager funds continued to position for the policies of the incoming administration across all sectors including energy, import, technology, and financials.
Hedge fund performance dispersion tightened in December, as the top decile of the HFRI FWC constituents advanced by an average of +5.5%, while the bottom decile fell by an average of -7.4%, representing a top/bottom dispersion of 12.9% for the month. By comparison, the top/bottom performance dispersion in November was 17.7%. For the full year 2024, the top decile of FWC constituents gained an estimated +37.3%, while the bottom decile declined -11.7%, representing a top/bottom dispersion of 49.0%. Approximately 45% of hedge funds produced positive performance in December.
Uncorrelated macro strategies led performance in December, as equities and bonds declined on expectations for fewer rate cuts by the US Federal Reserve in 2025. The HFRI Macro Asset Weighted Index advanced an estimated +1.6% in December, while the HFRI Macro (Total) Index gained +1.1%. Macro sub-strategy gains were led by the HFRI Macro: Commodity Index, which jumped +3.6%, and the HFRI Macro: Systematic Diversified/CTA Index, which gained +1.2% for the month. For the full year 2024, the HFRI Macro Index was the lowest performing main strategy index, gaining +5.95%, with Macro sub-strategy gains led by the HFRI Macro: Multi-Strategy Index, which advanced +7.7% for 2024.
Fixed income-based, interest rate-sensitive strategies produced another steady gain despite rising bond yields in December with the HFRI Relative Value (Total) Index gaining an estimated +0.2% for the month to notch its 14th consecutive monthly gain and 27th gain in last 30 months. RVA strategy performance was led by the HFRI RV: Asset Backed Index, which advanced +0.55% for the month, followed closely by the HFRI RV: Volatility Index, which added +0.49%. For the year, the HFRI RV: Yield Alternatives Index led RVA sub-strategies with a return of +11.3% in 2024.
Equity hedge (EH) funds, which invest long and short across specialised sub-strategies, pared industry leading performance gains in December despite topping equity market declines, with the HFRI Equity Hedge (Total) Index falling an estimated -0.7% for the month to bring the FY 2024 return to +12.3%, which led all main strategy indices for the year. EH sub-strategy performance was led by the HFRI EH: Technology Index in December, surging +2.7% for the month, while the HFRI EH: Equity Market Neutral Index added +0.5%. For the full year 2024, EH sub-strategy performance was led by the HFRI EH: Technology Index which surged +19.6%.
Event-driven (ED) strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, declined in December despite continued expectations for a strong M&A cycle into 2025. The HFRI Event-Driven (Total) Index fell an estimated -1.3% for the month, paring the strong annual gain to +8.7%. ED sub-strategy declines were led by the HFRI ED: Activist Index, which fell -4.6% for the month, while the HFRI ED: Special Situations Index declined -1.5% in December. For the full year 2024, ED sub-strategy performance was led by the HFRI ED: Multi-Strategy Index, which jumped +12.6%.
Liquid alternative UCITS strategies posted a narrow gain for December, with the HFRX Absolute Return Index gaining +0.08% while the HFRX Global Hedge Fund Index added +0.01% for the month. Strategy gains were led by the HFRX Event Driven Index, which gained +0.48% in December, while for the full year 2024, HFRX performance was led by the HFRX Equity Hedge Index, which gained +7.83%.
Industry-wide fees declined slightly into Q4 2024, as the average management fell one (1) basis point from the prior quarter to an estimated 1.34%, while the average incentive fee fell to 15.92%, a decline of 5 basis points over the quarter.
