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Macro posts strong gains as US Fed lowers rates, geopolitical uncertainty builds

HFRI Multi-Manager/Pod Shop Index adds +0.6 percent, managers position for election volatility

CHICAGO, (October 7, 2024) – Event-Driven hedge funds led strong, industry-wide gains in September as the US Federal Reserve lowered interest rates and managers positioned for increasing M&A into year-end despite continued escalation of military conflicts in the Middle East and Eastern Europe.

The HFRI Fund Weighted Composite Index (FWC)® gained +1.2 percent and the HFRI Asset Weighted Composite Index added +1.4 percent for the month, according to data released today by HFR, led by the HFRI Event-Driven (Total) Index, which advanced +1.8 percent in September, the second-highest monthly return over the first nine months of 2024.

The recently launched HFRI Multi-Manager/Pod Shop Index advanced +0.6 percent for the month as managers positioned for election volatility, while the HFR Cryptocurrency Index surged an estimated +5.4 percent, increasing its YTD return to +17.7 percent.

The HFRI Multi-Manager/Pod Shop Index is comprised of funds of various strategy types that utilize a multi-manager or Pod Shop structure, whereby fund capital is allocated to multiple independent investment teams referred to as Pods. The Pods are autonomous but generally operate within certain portfolio management or risk guidelines, and capital is allocated to or from these Pods in a discretionary manner under the supervision of a Chief Investment Officer.

Hedge fund performance dispersion expanded in September, as the top decile of the HFRI FWC constituents advanced by an average of +8.9 percent, while the bottom decile fell by an average of -4.1 percent, representing a top/bottom dispersion of 13.0 percent for the month. By comparison, the top/bottom performance dispersion in August was 11.5 percent. In the trailing 12 months ending September 2024, the top decile of FWC constituents gained +41.1 percent, while the bottom decile declined -11.9 percent, representing a top/bottom dispersion of 53.0 percent. Approximately seventy percent (70%) of hedge funds produced positive performance in September.

Event-Driven (ED) strategies, which often focus on out-of-favor, deep value equity exposures and speculation on M&A situations, led strategy gains in September as the US Federal Reserve lowered interest rates, with the HFRI Event-Driven (Total) Index jumping +1.8 percent. The HFRI ED: Distressed/Restructuring Index led ED sub-strategy performance in September, advancing +2.2 percent, while the HFRI ED: Special Situations Index added +2.1 percent, as managers positioned for a building M&A cycle through year-end, as a result of falling rates, clarity on US presidential election, and improving economic outlook.

Macro strategies also advanced in September, reversing four consecutive monthly declines as interest rates fell; Macro led strategy performance in early 2024 with four consecutive months of gains prior to the declines. The HFRI Macro (Total) Index advanced +1.3 percent and the HFRI Macro (Total) Index – Asset Weighted added +1.4 percent in September, led by Discretionary Thematic and Multi-Strategy exposures, as managers positioned for continued falling rates and an improving global economic outlook. The HFRI Macro: Discretionary Thematic Index led Macro sub-strategy performance in September, surging +3.0 percent, while the HFRI Macro: Multi-Strategy Index added +2.1 percent for the month.

Equity Hedge (EH) funds, which invest long and short across specialized sub-strategies, also posted strong performance for September as the HFRI Equity Hedge (Total) Index advanced an estimated +1.2 percent for the month to bring the YTD return to +10.2 percent, leading all main strategy indices YTD 2024; the HFRI EH (Total) Index – Asset Weighted gained +1.6 percent in September. EH sub-strategy gains were led by the HFRI EH: Fundamental Growth Index, which surged +3.2 percent for the month, and the HFRI EH: Multi-Strategy Index, which added +1.7 percent.

Fixed income-based, interest rate-sensitive strategies also advanced in September, as the US Federal Reserve lowered interest rates and managers positioned for additional interest rate cuts. The HFRI Relative Value (Total) Index gained an estimated +0.8 percent and the HFRI RV (Total) Index – Asset Weighted advanced +1.4 percent for the month, paced by the HFRI RV: Convertible Arbitrage Index, which advanced +1.3 percent, increasing its YTD 2024 return to +9.0 percent, the leading area of RV sub-strategy performance over the first nine months of the year.

Liquid Alternative UCITS strategies also posted gains in September, as the HFRX Market Directional Index gained +1.4 percent while the HFRX Global Hedge Fund Index advanced +0.95 percent. Strategy gains were led by the HFRX Macro Index, which advanced +1.85 percent, and the HFRX Relative Value Index, which added +1.1 percent.

The HFRI Diversity Index advanced an estimated +2.4 percent in September, and the HFRI Women Index surged +2.5 percent.

“Hedge funds gained to conclude the volatile third quarter, which included one of the largest intra-quarter spikes and dislocations in financial market volatility in several years, as geopolitical risks remained at generational levels, and as economic risks shifted from inflation to weakening global economic growth. Gains were strong across all strategies, led by Event-Driven exposures as investors positioned for an improving M&A environment into year-end, while Macro strategies recovered from several months of declines as managers navigated a major inflection point in interest rate expectations,” stated Kenneth J. Heinz, President of HFR. “Hedge fund managers continue to position for risks into year end, including geopolitical risks (upcoming election and ongoing military conflicts), as well as the way in which interest rate and economic risks have evolved in the past few months, while maintaining a keen awareness of the recent volatility spike and the potential for dislocations. Institutional investors interested in accessing many of the opportunities created by these rapid adjustments, as well as portfolio protection from associated volatility, are likely to increase exposures to managers which have demonstrated their strategy’s ability to deliver performance through recent volatility market cycles.”

Comments reference Flash Update performance figures as posted on October 7th, 2024.