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Macro and relative value lead hedge fund sector gains in October

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Macro strategies led hedge fund industry gains in October with the HFRI Macro (Asset Weighted) Index advancing +0.7% to record its third consecutive month of positive performance, bringing the trailing three-month return to an impressive gain of +4.2%.

The gains came against the backdrop of a surge in volatility surged prompted by a spike in geopolitical and interest rate risk, with equities and bonds exhibiting the same dangerous correlated declines as the prior month.

Overall, hedge funds posted mixed performance in October, as equities traded in a wide range, interest rates continued to rise on persistent inflation concerns, and geopolitical risks spiked with the outbreak of military conflict in Israel. Through this intense volatility and led by macro and relative value arbitrage, the HFRI Asset Weighted Composite Index (FWC) was essentially unchanged for the month, posting a narrow decline of -0.02%. The HFRI Fund Weighted Composite Index, which applies equal weights to all constituent funds, declined -1.4% for the month.

Performance dispersion declined slightly in October, as the top decile of the HFRI FWC constituents advanced by an average of +4.0%, while the bottom decile fell by an average of -8.8%, representing a top/bottom dispersion of 12.8% for the month. By comparison, the top/bottom performance dispersion in September was 13.4%. Through the first ten months of the year, the top decile of FWC constituents gained +22.7%, while the bottom decile declined -16.6%, representing a top/bottom dispersion of 39.3%. Approximately 30% of hedge funds posted positive performance in October.

Effectively navigating the third consecutive month of extreme volatility, the HFRI Macro (Asset Weighted) Index gained +0.7% in October, increasing its YTD 2023 return to +2.6%, as equities posted sharp, correlated declines on rising rates and expectations for weakening economic growth.

Macro sub-strategy performance was led by fundamental discretionary strategies as well as active trading strategies, with the HFRI 500 Macro: Discretionary Thematic Index gaining +1.6%, while the HFRI Macro: Active Trading Index added +0.42% for the month. The HFRI Macro: Currency Index advanced +0.2% in October, while the HFRI Macro: Commodity Index declined -2.9%.

Fixed income-based, interest rate-sensitive strategies also posted a narrow gain for October as interest rates surged, with the HFRI 500 Relative Value Index adding +0.2%. RVA sub-strategy performance was led by volatility and sovereign bond exposures, with the HFRI RVA: Volatility Index gaining +0.8%, while the HFRI RVA: Sovereign Index advanced +1.1%. These gains were partially offset by a decline in the HFRI RV: Convertible Arbitrage Index, which fell -1.5%.

Equity hedge funds, which invest long and short across specialised sub-strategies, posted declines in October, with negative contributions from technology and energy exposures; the HFRI Equity Hedge Index (Asset Weighted) declined -0.7% in October. EH sub-strategy declines were led by the HFRI EH: Technology Index fell an estimated -2.2% and the HFRI EH: Energy/Basic Materials Index which declined -2.7%.

Event-driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, posted declines in October as equity and rate volatility surged, driven by losses in Shareholder Activist and Distressed sub-strategies; the HFRI 500 Event Driven (Total) Index fell -1.6% for the month. ED sub-strategy declines were led by the HFRI 500 ED: Distressed Index, which fell -2.4% for the month, while the HFRI 500 ED: Activist Index lost -2.0%.

Liquid Alternative UCITS strategies also posted mixed performance in October as uncorrelated Macro gains offset Directional declines; the HFRX Absolute Return Index fell -0.35% for the month, while the HFRX Global Index lost -0.82%. Performance declines were led by the HFRX Event Driven Index, which fell -1.2% in October, partially offsetting the HFRX Macro Index which gained +0.3%.
The HFRI Diversity Index declined -1.3% in October while the HFRI Women Index fell by an estimated -1.1%.

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