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Hedge funds generate strongest first half returns in more than two decades

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Hedge funds gained more than 10 per cent in the six months of 2021, the industry’s strongest first half performance in 22 years, despite June seeing a shift in market sentiment which moderated the sector’s monthly returns. Now, managers are positioning for a “dynamic performance environment” heading into the second half of the year, shaped by ongoing Covid concerns, as well as energy and tech trends.

Hedge Fund Research’s main Fund Weighted Composite Index – a monthly measure of more than 1400 single manager hedge funds’ performance across all strategy types – gained 0.4 per cent in June, putting the benchmark up 10.03 per cent over the six-month period starting in January.

That January-to-June advance is the hedge fund industry’s best first-half performance since 1999, HFR said. It is also the longest run of consecutive monthly positive returns – which together totals 22 per cent – since the index registered 15 months of consecutive gains ending in January 2018.

While last month saw equity hedge funds and relative value-focused managers post broadly positive returns, some event driven strategies dipped into the red for the month following their recent strong run, while macro hedge funds also lost ground as recent inflation and interest rate trends cooled off, HFR’s monthly metrics show.

Equity hedge funds climbed 1.32 per cent last month to put their year-to-date returns at a strong 12.72 per cent overall, HFR data reveals. Every sub-strategy ended the month in the black, with quantitative directional managers (3.73 per cent), technology-focused strategies (3.48 per cent), and multi-strategy funds (2.61 per cent) topping the table for June. On a year-to-date basis, energy and basic materials-focused equity hedge fund are way out in front, up almost 20 per cent on the back of strong oil gains. Fundamental growth, fundamental value, quant directional and multi-strategy funds were all up between 11-17 per cent for H1.

Fixed income-based relative value strategies, which are sensitive to rate movements, have risen 5.55 per cent in the six months since the start of January, though June’s gains were somewhat muted at just 0.17 per cent. Multi-strategy relative value funds lost 1.08 per cent last month, which offset the sector’s broader modest gains elsewhere, as fixed income asset-backed, fixed income convertible arbitrage, and corporate-focused funds all posted returns of under 1 per cent.

Similarly, within event driven hedge funds, only distressed-focused hedge funds managed to notch up return of more than 1 per cent last month (up 1.46 per cent), while activist managers (-0.25 per cent) and multi-strategy (-0.11 per cent) dropped slightly into the red. But while event driven’s June returns reached less than 0.4 per cent, overall the sector remains well into positive territory on a year-to-date basis, up 11.52 per cent – powered by stellar gains activist (12.95 per cent), special situations (12.99 per cent) and distressed/restructuring strategies (14.80 per cent).

On the downside, macro hedge funds – which make bets on macroeconomic events using equities, fixed income, currencies, commodities and futures markets – ended June in the red, falling 0.96 per cent, but the strategy remains up almost 8 per cent over the six-month period.

Discretionary thematic funds lost 1.79 per cent in June, and multi-strategy macro managers fell 1.76 per cent, with systematic diversified (-1.53 per cent) and currency funds (0.71 per cent) also finishing the month in negative territory. However, commodity-focused funds rose 2.93 per cent, extending their H1 returns to 15 per cent, while most other macro funds are also up on a YTD basis.

In terms of winners and losers, the performance dispersion between underlying index constituents increased slightly in June, HFR said, with the top decile of the HFRI gaining an average of 7.6 per cent, while the bottom decile slipped 5.5 per cent for the month on average – a top-to-bottom gap of 13.1 per cent in June compared to 12.1 per cent in May.

HFR president Kenneth Heinz acknowledged that performance drivers and market sentiment shifted in June, as the economic reopening, higher interest rates and inflation trends – which defined the previous three quarters – moderated, with rates declined and equity market volatility remaining elevated.

“While investor optimism regarding the global reopening remains strong and justified, hedge fund managers and investors are positioning for a dynamic performance environment which may shift rapidly as a function of political developments, new information on virus mutation and vaccine efficacy, as well as demand shifts relating to consumer, technology and energy trends,” Heinz observed.

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