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HFRI Relative Value Arbitrage gains on global rate cuts despite inflation;  

Macro trend-following CTAs lead declines

 

CHICAGO, (July 8, 2024) – Hedge funds posted mixed performance in June as election and political risks surged throughout Asia, Europe and the US; as European and Asian central banks cut interest rates despite persistent inflationary pressures, while US large cap Technology stocks extended gains to record highs. With declines in uncorrelated Macro strategies offsetting gains in fixed income based Relative Value Arbitrage and Equity Hedge strategies, the HFRI Fund Weighted Composite Index (FWC)^® declined -0.2 percent in June, posting only the 2^nd decline in the last eight months, according to data released today by HFR.

The HFRI Relative Value Arbitrage Index (Total) Index gained +0.4 percent for the month, while the HFRI Equity Hedge (Total) Index added +0.3 percent. A fluctuating political environment dampened the performance of several hedge fund strategies during June leading to overall mixed performance. In a year of unprecedented national elections with countries comprising half the world’s population heading to the polls in 2024, sharp swings in political fortune and leadership have already been returned in many key democratic nations. Destabilizing fragmentation of political parties, shock election results (most recently in the French National Assembly elections), and the creeping polarization of voters into opposing right-wing and left-wing camps have become a pattern in European and US politics throughout 1H24.

Hedge fund performance dispersion declined again in June, as the top decile of the HFRI FWC constituents advanced by an average of +5.4 percent, while the bottom decile fell by an average of -5.7 percent, representing a top/bottom dispersion of 11.1 percent for the month. By comparison, the top/bottom performance dispersion in May was 12.4 percent. In the trailing 12 months ending June 2024, the top decile of FWC constituents gained +39.1 percent, while the bottom decile declined -11.9 percent, representing a top/bottom dispersion of 51.0 percent. Approximately 55 percent of hedge funds produced positive performance in June.

Fixed income-based, interest rate-sensitive strategies led industry gains in June as tension and speculation increased on 2H24 rates cuts, with the ECB and Bank of Japan cutting rates despite persistent inflation, while investors positioned for US Federal Reserve interest rate cuts. The HFRI Relative Value (Total) Index gained an estimated +0.4 percent for the month, increasing its 1H24 return to +3.8 percent. RVA sub-strategy performance was paced by the HFRI RV: FI-Sovereign Index and HFRI RV: FI-Asset Backed Index, each of which gained +0.7 percent in June, while the HFRI RV: Volatility Index added +0.4 percent.

Equity Hedge (EH) funds, which invest long and short across specialized sub-strategies, also posted gains in June, with gains in Quantitative Directional and Technology strategies partially offset by declines in Energy exposures. The HFRI Equity Hedge (Total) Index advanced an estimated +0.3 percent for the month, bringing the 1H24 return to +6.3 percent. EH sub-strategy gains were led by the HFRI EH: Quantitative Directional Index, which surged an estimated +3.8 percent, and the HFRI EH: Sector- Technology Index, which jumped +2.6 percent. Offsetting these gains, the HFRI EH: Energy/Basic Materials Index fell -1.9 percent for the month, while the HFRI EH: Multi-Strategy Index declined -0.85 percent. Through the first half of 2024, the HFRI EH: Quantitative Directional Index led all sub-strategies with a +12.9 percent return.

Event-Driven (ED) strategies, which often focus on out-of-favor, deep value equity exposures and speculation on M&A situations, declined narrowly in June, with losses driven by Activist and Special Situations exposures. The HFRI Event-Driven (Total) Index fell -0.10 percent for the month, with declines led by the HFRI ED: Activist Index, which fell -2.1 percent, and the HFRI ED: Special Situations Index, which lost -1.1 percent. Partially offsetting these, the HFRI ED: Multi-Strategy Index gained +0.6 percent.

Macro strategies posted declines in June, driven by losses in quantitative, trend-following CTA strategies and fundamental Commodity exposures, as geopolitical election risk and global interest rate uncertainty surged. The HFRI Macro (Total) Index fell -1.65 percent in June, the second consecutive monthly decline, with losses led by the HFRI Macro: Commodity Index, which fell -4.1 percent, while the HFRI Macro: Systematic Diversified Index declined -1.8 percent for the month. Despite declining in the last 2 months, the Macro (Total) Index was the second-leading area of strategy performance in 1H24, gaining +5.1 percent.

Liquid Alternative UCITS strategies posted gains in June, as the HFRX Global Hedge Fund Index advanced +0.3 percent for the month, led by the HFRX Equity Hedge Index, which returned +1.2 percent. The HFRX Market Directional Index also advanced in June, adding +1.0 percent for the month.

The HFRI Diversity Index advanced an estimated +0.2 percent in June, while the HFRI Women Index added +0.3 percent.

“Hedge funds posted mixed performance in June as election and geopolitical risks continued to surge, with fluid policy transitions adding to global interest rate and inflation uncertainty, with leadership from Relative Value credit and Equity Hedge strategies. Uncorrelated Macro hedge funds, which led strategy performance in the first four months of the year, posted its second consecutive monthly decline to end 1H24 on weakness in Commodity and trend following CTA exposures,” stated Kenneth J. Heinz, President of HFR. “Unprecedented election and geopolitical risk continue to drive positioning for hedge funds, accentuating an already unstable interest rate and inflation environment with these adding to dislocation risk associated with ongoing, active and potential military conflicts. Despite ongoing strength in the US large cap Technology sector, the performance of global Currency, Commodity and Bond markets continues to be volatile and impacted by fluid, and potentially destabilizing, policy changes and dislocations. As these powerful trends evolve in 2H24, institutions interested in accessing specialized opportunities created by this uncertainty, are likely to increase exposure to hedge funds which have demonstrated their strategy’s robustness of navigating these building and evolving risks over recent months and years.”

 

NOTE: June 2024 index performance figures are estimated as of July 8, 2024