Hedge funds extended their Q1 performance surge through March, led by macro strategies, which posted their best month since March 2022 and their strongest quarter in over 20 years, according to the latest data from HFR.
Industry-wide gains were driven by trend-following CTAs, energy, multi-strategy, healthcare and cryptocurrency exposures, expanding the 5-month return for the HFRI Fund Weighted Composite Index (FWC) to 11.1%, the strongest return seen since the five-month period ending April 2021.
The HFRI FWC surged an estimated 2.5% for the month, and the HFRI 500 FWC Index jumped 2.8%. Specialised cryptocurrency funds, which are separate from the HFRI Index, also surged in March as the HFR Cryptocurrency Index gained 19.1%.
Uncorrelated macro strategies surged to lead industry-wide gains in both March and for Q1 2024, as investors positioned for moderating inflation, falling interest rates, and an improving economic outlook, despite significant ongoing geopolitical uncertainty. The HFRI Macro (Total) Index jumped an estimated 3.9% for the month, bringing Q1 2024 performance to 6.9%, the strongest calendar quarter since Q2 2003. Macro sub-strategy gains were led by the HFRI Macro: Systematic Diversified Index, which jumped 4.5% in March and 10.1% for Q1 2024, its strongest calendar quarter since Q4 1999. The HFRI Macro: Trend Following Index also produced strong March performance, posting a 4.3% return to increase its Q1 2024 return to 8.7%, while the HFRI Macro: Multi Strategy Index added 3.9% for the month. Risk parity strategies also generated strong performance in March, with the HFR Risk Parity Vol 15 Index surging 5.4% for the month.
Performance dispersion declined in March, as the top decile of the HFRI FWC constituents advanced by an average of 9.5%, while the bottom decile fell by an average of 2.1%, representing a top/bottom dispersion of 11.6% for the month. By comparison, the top/bottom performance dispersion in February was 15.8%. In the trailing 12 months ending March 2024, the top decile of FWC constituents gained 45.2%, while the bottom decile declined 10.0%, representing a top/bottom dispersion of 55.2%. Approximately 85% of hedge funds produced positive performance in March.
Equity hedge (EH) funds, which invest long and short across specialised sub-strategies, also posted strong performance in March, with gains led by energy, quantitative directional, and healthcare exposures. The HFRI Equity Hedge (Total) Index jumped an estimated 2.4% for the month, bringing the Q1 gain to 5.5%. EH sub-strategy performance was led by the HFRI EH: Energy/Basic Materials Index, which surged 3.8% in March, the HFRI EH: Quantitative Directional Index, which jumped 3.2%, and the HFRI EH: Healthcare Index, which added 2.8% 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 advanced in March with gains led by special situations, distressed, and activist exposures. The HFRI Event-Driven (Total) Index advanced 2.2% for the month, increasing its Q1 return to 2.9%. ED sub-strategy performance was led by the HFRI ED: Special Situations Index which surged 4.1% in March, the HFRI ED: Distressed/Restructuring Index, which advanced 2.7%, and the HFRI ED: Activist Index, which added 2.2% for the month.
Fixed income-based, interest rate-sensitive strategies also gained in March as investors positioned for moderating inflation, falling interest rates and improving economic outlook, with the HFRI Relative Value (Total) Index advancing an estimated 1.0% for the month to bring its Q1 2024 return to 2.5%. RVA performance was led by the HFRI RV: Yield Alternatives Index in March, jumping 3.8%, while the HFRI RV: FI-Convertible Arbitrage Index added an estimated 1.5% for the month.
Liquid alternative UCITS strategies also advanced in March, led by the HFRX Macro Index, which gained 2.5%; the HFRX Global Index returned 1.3%, while the HFRX Market Directional Index added 1.5%.
The HFRI Diversity Index surged an estimated 3.4% in March, while the HFRI Women Index jumped 2.9%.
In a statement, Kenneth J Heinz, President of HFR, said: “Hedge funds generated robust performance in March to conclude its strongest Q1 since 2021, with positive contributions from CTAs, energy, multi-strategy, healthcare, and cryptocurrency exposures, and as uncorrelated macro posted its highest quarter in over 20 years.
“In contrast to most of 2023, the macroeconomic environment in Q1 was dominated by expectations for falling inflation and interest rates, and improving expectations for economic growth, despite ongoing, fluid, uncertain and potentially volatile elevated geopolitical risk.
“Managers remain keenly focused on this tension between falling macroeconomic risk and rising geopolitical risk in 2024, with potential for sharp reversals, volatility and dislocation driven by either of these powerful trends. Institutional investors interested in opportunistic exposure to these trends while also insulating portfolios from potential volatility are likely to allocate or increase exposure to funds which have demonstrated their strategy’s robustness and veracity over the recent market cycles.”
