Hedge funds advanced in April as equities declined, led by macro strategies, which extended their first quarter gains through the month, and the industry’s largest funds, with the HFRI Macro Asset Weighted Index advancing 2.6%.
Fixed income-based relative value arbitrage strategies also gained on expectations for continued inflation and higher interest rates, as directional strategies posted declines. Larger funds outperformed mid-to-smaller hedge funds with the HFRI Asset Weighted Composite Index gaining 0.9%, while the HFRI Fund Weighted Composite Index (FWC), which is equally weighted rather than asset weighted, declined 0.6%.
Macro strategies posted gains inversely correlated with equity market declines in April, which came as financial markets pared Q1 advances on economic data showing persistent inflationary pressures, extending strong YTD 2024 performance as the fluid and uncertain macroeconomic environment shifted to begin Q2, coupled with significant ongoing geopolitical uncertainty.
The HFRI Macro Asset Weighted Index advanced 2.6% for the month, bringing YTD 2024 performance to 9.8%, while the equal-weighted HFRI Macro (Total) Index gained 1.5%. Macro sub-strategy gains were led by the HFRI Macro: Commodity Index, which jumped 3.0% in April, while the HFRI Macro Discretionary Thematic Index jumped 2.1%; the HFRI Macro: Trend Following Index advanced 1.3% for the month.
Performance dispersion expanded in April, as the top decile of the HFRI FWC constituents advanced by an average of 5.9%, while the bottom decile fell by an average of 8.4%, representing a top/bottom dispersion of 14.3% for the month. By comparison, the top/bottom performance dispersion in March was 11.3%. In the trailing 12 months ending April 2024, the top decile of FWC constituents gained 38.2%, while the bottom decile declined 11.0%, representing a top/bottom dispersion of 49.2%. Approximately half of hedge funds produced positive performance in April.
Fixed income-based, interest rate-sensitive strategies advanced in April as investors positioned for persistent inflation and continued elevated interest rates, also coinciding with an improving economic outlook. The HFRI Relative Value (Total) Index gained an estimated 0.3% for the month to bring its YTD 2024 return to 2.8%. RVA performance was led by the HFRI RV: Yield Alternatives Index, which advanced 0.8% in April, while the HFRI RV: Multi-Strategy Index added an estimated 0.7% for the month.
Equity hedge (EH) funds, which invest long and short across specialised sub-strategies, declined in April, driven by losses in healthcare, technology, and quantitative directional exposures. The HFRI Equity Hedge (Total) Index fell 1.6% for the month, lowering the YTD 2024 return to 3.4%. EH sub-strategy declines in April were led by the HFRI EH: Sector-Healthcare Index, which fell an estimated 4.3%, the HFRI EH: Technology Index, which declined 3.0%, and the HFRI EH: Quantitative Directional Index, which fell 2.9% for the month. Partially offsetting these losses, the HFRI EH: Energy/Basic Materials Index gained 2.1% and the HFRI EH: Equity Market Neutral Index added 1.3% for the month.
Event-driven (ED) strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, also declined in April, driven by losses in activist and special situations exposures. The HFRI Event-Driven (Total) Index fell 1.9% for the month, with ED sub-strategy performance declines led by the HFRI ED: Activist Index, which fell 8.0%, and the HFRI ED: Special Situations Index, which lost 2.6% for the month.
Liquid Alternative UCITS strategies posted mixed performance in April, with the HFRX Macro Index posting a narrow gain of 0.05%, and the HFRX Global Index declining 0.54%, while the HFRX Absolute Return Index fell 0.13% for the month.
The HFRI Diversity Index declined an estimated 0.4% in April, while the HFRI Women Index fell 0.2%.
In a statement, Kenneth J Heinz, President of HFR, said: “Hedge funds posted impressive gains in April led by macro strategies and the industry’s largest, most established funds as financial markets experienced a crucial inflection point, reversing from the dominant risk-on sentiment in Q1 to a powerful risk-off sentiment as investors positioned for persistent inflations, elevated interest rates, and continued extreme levels of geopolitical risk.
“The performance of macro funds is both strong and impressive in that macro contains many of the industry’s largest, most capital concentrated funds.
“Historically, macro has the lowest correlation to broader equity markets (in the case of April, negatively correlated with equity market declines) and that macro posted one of its strongest quarters in 20 years in Q1 2024, through an environment which was dominated by the complete opposite of risk sentiment than the trends in early Q2 2024. This demonstrated positive-optionality and volatility-positive positioning is likely to continue to attract capital from institutional investors looking for exactly what macro is providing through the recent market cycles—specialised participation in powerful gains, portfolio protection/negative correlation in risk-off environments.”
