In a broadly strong year for returns, cryptocurrency-focused funds blew the lights out with astonishing return figures.

Hedge funds advanced in December to click up double-digit percentage gains for 2021, bolstering the standing of a sector that hasn’t always thrived in the aftermath of the 2008 financial crisis, according to figures from Chicago-based Hedge Fund Research.

The investable HFRI 500 Fund Weighted Composite Index gained by 0.9 per cent in December, reversing the prior month’s decline, while the HFRI Fund Weighted Composite Index® (FWC) advanced by 1.3 per cent. For the full year, the HFRI FWC gained 10.3 per cent, narrowly trailing the prior year’s gain of 11.8 per cent but marking the third highest calendar year performance since 2009.

A standout segment was hedge funds investing in cryptocurrencies; they led all strategies last year, and the HFR Cryptocurrency Index skyrocketed 215 per cent, topping the 2020 return of 193 per cent, HFR said.

Equity hedge funds, which invest long and short across specialised sub-strategies, led industry strategy gains in December and reversed the prior month’s decline, as global equities traded in a wide intra-month range but recovered from an intra-month decline driven by fears of the Omicron coronavirus variant spreading.

“Since and inclusive of the historic equity market collapse from the outbreak of the global pandemic, equity-focused hedge fund strategies have significantly outperformed US equities (as represented by the DJIA) by over 200 basis points and have done so with one-third less volatility,” Kenneth J Heinz, president of HFR, said. “Into 2022, hedge fund managers are positioning for continued volatility associated with the global pandemic but are also tactically focused on capital preservation across equity, fixed income, and commodity markets, considering the powerful dynamics of rising interest rates and record inflation.”

The investable HFRI 500 Equity Hedge Index gained 1.7 per cent for the month, bringing the full year 2021 performance to 11.9 per cent, while the HFRI Equity Hedge (Total) Index advanced by 1.85 per cent, led by gains in healthcare and fundamental value exposures. The HFRI EH: Healthcare Index surged 3.9 per cent while the HFRI Fundamental Value Index added 2.4 per cent for the month. For the full year 2021, EH performance was led by the HFRI EH: Energy/Basic Materials Index which jumped 26.2 per cent.

Event-driven strategies, which often focus deep value equity exposures and speculation on merger and acquisition situations, also gained in December, driven by activist and special situations strategies. The investable HFRI 500 Event-Driven Index gained 1.3 per cent, while the HFRI Event-Driven (Total) Index advanced 1.8 per cent for the month, bringing full year 2021 performance to 13.1 per cent, the highest performance since 2009. 

Fixed income-based, interest rate-sensitive strategies also advanced for the month, as interest rates increased and managers continued to position for the near-term tapering on bond purchases by the US Federal Reserve. Macro strategies rose, as commodities gained while interest rates continued to rise.

The performance dispersion of the underlying HFRI Index constituents narrowed in December, with the top decile of the HFRI gaining an average of up by 6.6 per cent, while the bottom decile fell by an average of 3.5 per cent for the month, representing a top-bottom dispersion of 10.1 per cent for the month, far narrower than the spread of 19.1 per cent in November.