Hedge Funds End 2023 on a Good Note
Posted by Colin Lambert. Last updated: January 9, 2024
Hedge funds received a nice boost from December volatility to deliver a strong end to the year for investors, with the HFRI Fund Weighted Composite Index rising an estimated 2.6% on the month.
The index, constructed and managed by indexation and analysis firm HFR, returned 7.5% for 2023 and outperformed the broader HFRI 500 Index, which returned 1.9%.
One of the stars of the year, especially during the tougher periods, Macro, provided small gains to end the year with the HFRI Macro (Total) Index rising an estimated 0.6% for the month. Macro sub-strategy gains were led by the HFRI Macro: Active Trading Index, which advanced 2.1 %, and the HFRI Macro: Multi-Strategy Index, which added 1.5%.
Fixed income-based, interest rate-sensitive strategies also gained in December, as interest rates declined, and investors positioned for falling interest rates and an improving economic outlook. The HFRI Relative Value (Total) Index advanced 1.5%, led by the HFRI RV: FI-Sovereign Index, which gained 2.9%, and the HFRI RV: Multi-Strategy, which added an estimated +2.5%.
The “risk-on” nature of the month was reflected in Event-Driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, surging in December as equities, credit and M&A all gained for the month, with the HFRI Event-Driven (Total) Index jumping 4.5%, the strongest monthly gain since November 2020.
Performance dispersion declined in December, as the top decile of the HFRI FWC constituents advanced by an average of +11.5%, while the bottom decile fell by an average of -3.6%, representing a top/bottom dispersion of 15.1%. By comparison, the top/bottom performance dispersion in November was 18.8%.
For the full year 2023 year, the top decile of FWC constituents gained +36.1%, while the bottom decile declined -15.1%, for a top/bottom dispersion of 51.2%. Approximately 80% of hedge funds produced positive performance in December, HFR estimates.
“Positive performance trends in hedge funds continued into December and through year-end, led by the strongest month for Event-Driven strategies in over three years, with gains driven by falling inflation and rates, structural developments in cryptocurrencies, and developing strength in M&A and Special Situations, including Shareholder Activist strategies,” says Kenneth Heinz, president of HFR. “With an acceleration of the strong year-end trends, the outlook for hedge fund performance into 2024 has improved with higher nominal levels of bond yields, continuation of powerful AI-driven technology trends, expanding cryptocurrency liquidity and access, with an improving outlook for the introduction of spot bitcoin ETFs, and strength in M&A.
“Despite the year-end improvement, managers remain sensitive to heighted geopolitical risks associated with ongoing or potential military conflicts and the economic impacts of expansion of these, including increased potential for volatility and systemic dislocations, as well as supply chain disruptions,” he continues. “With all of these trends coming together into 2024, institutions are likely to increase allocations to leading managers which provide opportunistic access to these trends, while also providing defensive capital preservation against expected portfolio volatility, with these driving industry growth through the new year.”