Hedge fund performance surged through year-end, with December showing an acceleration in gains driven by a decline in inflation, falling bond yields, and structural developments in cryptocurrency, according to HFR.
The HFRI Fund Weighted Composite Index (FWC) jumped an estimated +2.6% over the month, bringing the 2023 calendar year return to +7.5%.
The HFRI 500 also advanced +1.9%, while the HFR Cryptocurrency Index vaulted +11.7%, and the HFR Risk Parity Vol 15 Index advanced +7.0%. For the full year 2023, the HFR Cryptocurrency Index returned +65.8%.
Performance dispersion declined in December, as the top decile of the HFRI FWC constituents advanced by an average of +11.5%, while the bottom decile fell by an average of -3.6%, representing a top/bottom dispersion of 15.1 percent for the month. By comparison, the top/bottom performance dispersion in November was 18.8%. For the full year 2023 year, the top decile of FWC constituents gained +36.1%, while the bottom decile declined -15.1%, representing a top/bottom dispersion of 51.2%. Approximately eighty percent (80%) of hedge funds produced positive performance in December.
Event-driven (ED) strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, surged in December as equities, credit and M&A all gained for the month, with the HFRI Event-Driven (Total) Index jumping +4.5%, the strongest monthly gain since November 2020. ED sub-strategy performance was driven by the HFRI ED: Activist Index, which surged +9.2%, and the HFRI ED: Special Situations Index, which jumped +5.2%. Also contributing to broad-based gains, the HFRI ED: Merger Arbitrage Index advanced +3.8%. For the full year 2023, the HFRI Event-Driven (Total) Index jumped +10.7%, led by the HFRI ED: Activist Index which led all sub-strategies, returning +20.2%.
Equity hedge (EH) funds, which invest long and short across specialised sub-strategies, also surged in December, with Healthcare, Fundamental Value, and Quantitative Directional funds leading EH sub-strategy gains. The HFRI Equity Hedge (Total) Index jumped +3.6 percent (estimated) for the month, while the HFRI 500 Equity Hedge Index also surged +3.25%. All EH sub-strategies posted gains for the month, led by the HFRI EH: Sector-Healthcare Index, which vaulted +5.5%. Also producing strong performance, the HFRI EH: Fundamental Value Index jumped +4.4%, while the HFRI EH: Quantitative Directional Index added an estimated +3.7 percent in December. For the full year 2023, the HFRI Equity Hedge (Total) Index jumped +10.4%, led by the HFRI EH: Quantitative Directional Index and HFRI EH: Healthcare Index, each of which returned +13.8%.
Fixed income-based, interest rate-sensitive strategies also gained in December, as interest rates declined, and investors positioned for falling interest rates and an improving economic outlook. The HFRI Relative Value (Total) Index advanced +1.5 percent (estimated) for the month, led by the HFRI RV: FI-Sovereign Index, which gained +2.9%, and the HFRI RV: Multi-Strategy, which added an estimated +2.5%. For the full year 2023, the HFRI Relative Value (Total) Index returned +7.2%, led by the HFRI RV: FI-Sovereign Index which gained +10.8%.
Uncorrelated macro strategies posted a narrow gain in December as interest rates and commodities fell while risk tolerance increased, with the HFRI Macro (Total) Index advancing +0.6 percent (estimated) for the month. Macro sub-strategy gains were led by the HFRI Macro: Active Trading Index, which advanced +2.1 percent in December, and the HFRI Macro: Multi-Strategy Index, which added +1.5 percent for the month.
Liquid alternative UCITS strategies also produced gains in December, led by the HFRX Market Directional Index gaining +2.85%, while the HFRX Equal Weighted Strategies Index advanced +1.6%. Strategy gains were led by the HFRX Relative Value Index, which returned +2.1 percent in December, while the HFRX Equity Hedge Index advanced +1.6%.
The HFRI Diversity Index advanced an estimated +3.9% in December, while the HFRI Women Index added +2.7%.
