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Hedge funds ride out market reversals with “impressive” September performance

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Hedge funds’ performances remained in marginally positive territory throughout September, with year-to-date industry returns staying above 10 per cent heading into the final quarter of 2021, as managers grappled with sharp reversals in equities and fixed income amid heightened inflationary pressures.

New data published by Hedge Fund Research shows managers overall gained 0.13 per cent in September. That gain puts HFR’s main Fund Weighted Composite Index – a broad-based index tracking the monthly returns of some 1400 single manager hedge funds across all strategy types – up 10.09 per cent since the start of January.

“Hedge funds posted broad-based gains in September across fixed income, commodity and event-driven strategies, which were inversely-correlated to steep declines across global equity and fixed income markets,” stated HFR president Kenneth Heinz. “Given the magnitude of equity and bond declines, the positive outperformance represents one of the most impressive performances of the HFRI in recent history.”

On a quarterly basis, the benchmark was flat in Q3, dipping 0.03 per cent in the three months between July and September. However, that disappointing showing was outweighed by positive gains earlier in the year of 5.74 per cent in Q1 and 4.14 per cent in Q2. Over the past nine months, the benchmark has suffered just one down month, a slight 0.91 per cent dip in July.

“In contrast to prior periods in which hedge fund performance was driven by a high beta, risk-on market environment, the current fluid macroeconomic environment requires greater specialisation, tactical flexibility and strategic portfolio execution, all of which were exhibited in September,” Heinz observed.

Fixed income-focused hedge funds led the pack in what proved to be a lukewarm month for returns. HFR’s fixed income-based, interest rate-sensitive Relative Value was up almost 1 per cent for the month – gaining 1.21 in Q3 and 7.86 per cent year-to-date – as managers capitalised on interest rates rises fueled by stimulus forecasts, as well as decreased bond purchases by the US Federal Reserve and rising inflationary pressures.

Within the sub-sector, convertible arbitrage strategies, multi-strategy managers, fixed income asset-backed managers, and corporates-focused funds were all up in September, albeit less than 1 per cent.

Equity-focused hedge funds have made the biggest gains on a year-to-date basis, with the HFRI equity hedge index up 11.46 per cent since the start of January. But the sector lagged the rest of the industry in September, sliding 0.35 per cent for the month.

As oil and gas prices spiked, energy and basic materials-focused hedge funds added 4.11 per cent last month, and are up more than 24 per cent so far this year. Quantitative directional strategies took the biggest hit, losing 3.62 per cent in September, though they remain up 6.54 per cent in 2021. Despite falling 1.54 per cent last month, multi-strategy equity funds have advanced 11.14 per cent YTD. Fundamental growth, technology, and healthcare-focused hedge funds all registered monthly losses, while fundamental value was up slightly at 0.18 per cent, and has risen more than 15 per cent in 2021.

Macro hedge funds – which trade broader macroeconomic and geopolitical trends using equities, bonds, currencies, and commodities, among other assets – returned 0.54 per cent last month, aided by rising rates, spiraling energy prices and falling equities. Overall, the sector is up more than 8 per cent in the nine months since the start of the year.

Commodities-based macro funds were the standout performer, up 5.18 per cent in September, bringing YTD returns to more than 21 per cent. Currency macro funds were up 1 per cent, while discretionary thematic macro funds dropped slightly into the red, losing 0.40 per cent in September.

Meanwhile, event driven hedge funds – which target stock mispricings and other valuation anomalies stemming from mergers and acquisitions, bankruptcies, takeovers and other corporate events – added just 0.04 per cent in September. But thanks to stronger returns earlier in the year, these managers are up more than 11 per cent in 2021. Merger arb funds gained 1.24 per cent, while credit arb, distressed and restructuring and multi-strategy funds were up just under 1 per cent. Year-to-date, distressed/restructuring funds lead the event driven pack, with a 14.47 per cent advance.

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