Hedge Funds Mixed in August

Hedge fund indexation firm HFR says August was a difficult month for many hedge funds with mixed performance from Macro managers and declines in equities offset to a degree by positive fixed income performance.

The HFRI Fund Weighted Composite Index (FWC) fell 0.5% overall, while the investable HFRI 500 Fund Weighted Composite Index declined an estimated -1.1%. Event-Driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, led strategy gains in August, driven by Merger Arbitrage and Credit Arbitrage sub-strategies. The HFRI Event-Driven (Total) Index advanced 0.4% for the month, while the HFRI Institutional Event-Driven Index added and estimated 0.8 %.

Macro strategies posted mixed performance, but was led by Multi-Strategy and fundamental Discretionary Thematic sub-strategies. The HFRI Macro Asset Weighted Index declined 0.2% for the month, while the investable HFRI 500 Macro Index posted an estimated decline of -0.6%. The HFRI 500 Macro: Multi-Strategy Index was up an estimated 1.6%, while the HFRI Macro: Discretionary Thematic Index added 0.3%.

Fixed income-based, interest rate-sensitive strategies also advanced in August as interest rates increased and inflationary pressures remained persistent. The HFRI Relative Value (Total) Index gained an estimated 0.3%, while the HFRI Institutional Relative Value Index was up 0.7%.

Larger funds outperformed smaller funds, with the HFRI Asset Weighted Index posting a narrow decline of 0.14%, while the HFRI Institutional Fund Weighted Composite Index produced a similar decline of 0.19%. Performance dispersion once again ticked slightly lower in August, as the top decile of the HFRI FWC constituents advanced by an average of +4.8%, while the bottom decile declined by an average of -7.7%, representing a top/bottom dispersion of 12.5% for the month, compared to 13.1% in July. Through the first eight months of the year, the top decile of FWC constituents are +26.9%, while the bottom decile is -14.0%, representing a top/bottom dispersion of 40.9%. Approximately half of hedge funds posted positive performance in August.

“Hedge fund performance in August showed a key inflection point and partial reversal of some of the powerful, technology-driven trends which had dominated the prior two months of gains,” says Kenneth Heinz, president of HFR. “Credit, transactional and M&A sensitive Event Driven strategies led performance for the month with negatively correlated gains as interest rates increased and equities posted declines. Interest rate sensitive Relative Value Arbitrage also advanced in August, as broader equity and fixed income markets declined on weakening inflation and interest rate outlook into 2H23.

“The strong, concentrated tailwind of AI Technology gains which has driven equity market performance and contributed to HFRI performance since late May remains a powerful, dominant market trend but also a source of volatility and potential dislocation, accentuated by the uncertainty and fluidity of fluctuation in interest rates and inflation expectations,” he continues. “Expecting this market paradigm to continue through year-end, institutional investors will benefit from the positive optionality and combination of positive beta to upside trends while also maintaining the portfolio protection which leading hedge fund strategies offer.

“As a result, investors are likely to increase allocations to managers which have demonstrated their strategy’s robustness through the volatility of the past 12-24 months,” he concludes.