Hedge funds – as their name implies – gained some of their original fame from their ability to offset or hedge certain market movements. It appears from new data that this characteristic is alive and well.
Macro strategies in the world’s $4 trillion-plus hedge fund sector outperformed falling equity and bond markets during April, demonstrating these funds’ famed ability to buck certain investment trends, industry figures show.
The investable HFRI 500 Macro Index surged 5.05 per cent in April, extending its year-to-date return to 15.5 per cent, with strong contributions from commodity, fundamental discretionary, and quantitative, trend-following strategies, according to Hedge Fund Research.
The investable HFRI 500 Fund Weighted Composite Index posted a gain of 0.2 per cent for the month, extending its YTD return to 0.3 per cent, as the S&P 500 posted the largest monthly decline since March 2020 and the Nasdaq posted the largest decline since October 2008.
Larger funds fared stronger than smaller and mid-sized funds in April, as the HFRI Asset Weighted Composite Index gained 2.3 per cent for the month, increasing its YTD return to 4.2 per cent.
“Hedge fund managers and investors have effectively adapted to the current fluid market paradigm defined by extreme volatility, massive dislocations, and tremendous uncertainty, demonstrating tactical flexibility and operating as liquidity providers through the volatility. Institutional investors are prioritizing interest rate sensitivity and duration, inflation protection, capital preservation and volatility positive portfolio attributes, with minimal correlation to current equity market declines,” Kenneth Heinz, president of HFR, said.
Chicago-based HFR has also said that capital inflows totalled $19.8 billion into hedge funds during the first quarter of 2022 – the largest quarterly inflow since the second quarter of 2015.
The world's hedge fund industry at times struggled in the aftermath of the 2008 financial crash and the subsequent rebound by equity markets, driven by large central bank monetary creation, aka quantitative easing. Fees came under pressure, and some influential commentators such as Warren Buffett frowned on the sector. However, recent specific figures suggest that certain hedge funds remain a useful part of investors' toolkits.
Fixed income-based, interest rate-sensitive strategies posted mixed performance for the month as bonds and equities declined in a correlated manner as the US Federal Reserve prepared to increase interest rates to curb historic inflation; the investable HFRI 500 Relative Value Index fell by 0.1 per cent while the HFRI Relative Value (Total) Index fell 0.4 per cent in April.
Event-driven strategies, which often focus on unloved, deep value equity exposures and speculation on merger and acquisition situations, posted declines in April, HFR said.
The investable HFRI 500 Event-Driven Index and the HFRI Event-Driven (Total) Index declined 2.2 per cent for the month.
Equity hedge funds, which invest long and short across specialised sub-strategies, also declined in April, with the investable HFRI 500 Equity Hedge Index falling 3.25 per cent while the HFRI Equity Hedge (Total) Index fell 3.1 per cent.
“Hedge funds advanced in April as financial market volatility spiked while global equity and fixed income plunged in a record and correlated manner, with gains driven by further acceleration of a historic, negatively correlated surge in macro strategies,” Heinz said. “Accelerating the recent trends of the past few months, the surge in global macro performance occurred against a backdrop of geopolitical uncertainty and macroeconomic turmoil driven by rampant inflation, increasing interest rates and acceleration of the military conflict following the Russian invasion of Ukraine.”