A monthly snapshot of the hedge fund industry's results confirmed that when markets turn bearish and volatile, certain strategies can still put money on the table.

Fresh figures show that hedge funds’ overall returns sagged in June, unable to shrug off the slippage to global equity, bond and other markets, even though certain sub-sectors were able to go against the trend.

Equities have chalked up the worst first half of a calendar year in more than 50 years as the prospect of higher interest rates to curb inflation, supply chain disruptions, surging energy costs and geopolitical worries hit sentiment. 

The investible HFRI 500 Fund Weighted Composite Index dropped by 2.6 per cent for the month, the largest decline since March 2020, as gains in quantitative, trend-following CTA and market-neutral equity strategies were offset by declines in the highest beta equity and fixed income strategies, according to data released from Hedge Fund Research.

Larger, more established hedge funds outperformed smaller hedge funds in both June and year-to-date for 2022, as the HFRI Asset Weighted Composite Index (which has the same constituents as the equal-weighted version) fell 0.9 per cent for the month and has gained 1.55 per cent through mid-year 2022.

“Powerful risk-off trends accelerated in June driving extreme financial market volatility with hedge funds trading through a wide range of risks including not only generational inflation, increasing interest rates, the continuation of the Russia/Ukraine war and record energy price increases, but also the increased likelihood of a consumer-led US economic recession,” Ken Heinz, HFR president, said. 

Macro defies the trend
A few days ago, HFR noted how macro strategies have, at least for most of 2022, been able to deliver some of the positive returns that give hedge funds their name i.e. a “hedge” against market movements. Latest figures confirmed that point: The investible HFRI 500 Macro Index posted a narrow gain of 0.05 per cent in June, extending year-to-date performance to 14.2 per cent, with strong contributions from quantitative, trend-following Commodity Trading Advisor and active trading strategies.

Elsewhere, HFR said that the HFRI Fund Weighted Composite Index fell by 3.1 per cent in June, lowering year-to-date performance to -5.9 per cent. For comparison, the FWC Index outperformed the S&P 500 by 1,600 basis points and the Nasdaq Composite by 2,550 bps through the first six months of 2022, both representing the largest outperformance of equity markets in the first half of a calendar year since FWC Index inception in 1990.

Fixed income-based, interest rate-sensitive strategies declined in June, as the investible HFRI 500 Relative Value Index fell 2.0 per cent, while the HFRI Relative Value (Total) Index lost 1.75 per cent. 

Event-driven strategies, which often focus on out-of-favor, deep value equity exposures and speculation on M&A situations, suffered losses. The investible HFRI 500 Event-Driven Index fell 4.15 per cent and the HFRI Event-Driven (Total) Index lost 4.14 per cent for the month. 

Equity hedge funds, which invest long and short across specialized sub-strategies, also declined in June, as the investible HFRI 500 Equity Hedge Index fell 4.3 per cent while the HFRI Equity Hedge (Total) Index lost 4.5 per cent. 

“With expectations for the H1 2022 volatility to continue through H2, institutional investors are likely to increase commitments to strategies which have demonstrated their ability to preserve capital through recent declines, while opportunistically positioning for dynamic positive or negative market environments,” Heinz added.