Hedge Funds’ Winning Streak Over

Hedge funds posted their first decline, albeit slight, in July, ending a run of positive monthly performance that started in October 2020.

The HFRI Fund Weighted Composite Index, which is collated by Hedge Fund Research (HFR), fell -0.6 percent in July, while the investable HFRI 500 Fund Weighted Composite Index declined by 0.5 percent, according to data released today by HFR.

The HFRI FWC Index has gained 9.5 percent through the first seven months of 2021, including the strongest performance in the first half of a calendar year since 1999. In the trailing nine-month period ending July 2021, the HFRI FWC has surged over 21 percent. Driven by investor inflows and strong performance, total hedge funds industry capital surged to a record $3.96 trillion through mid-year 2021.

The performance dispersion of the underlying index constituents narrowed in July, as the top decile of the HFRI gained an average of 4.8 percent, while the bottom decile declined an average of 7.1 percent for the month, representing a top-bottom dispersion of 11.9 percent in July compared to a top-bottom dispersion of 13.0 percent in June. Over the first seven months of the year, the top decile of the HFRI jumped an average of +37.1 percent, while the bottom decile declined an average -8.2 percent.

Uncorrelated Macro strategies posted mixed performance on equity, inflation, and economic reopening data with the HFRI Macro (Total) Index declining 0.1 percent for the month, while the investable HFRI 500 Macro (Total) Index added/fell 0.2 percent. There was a positive in macro sub-strategy performance as the HFRI Macro: Systematic Diversified Index, which advanced 0.6 percent in July.

The fixed income-based, interest rate-sensitive HFRI Relative Value (Total) Index declined 0.8 percent while the investable HFRI 500 Relative Value Index fell 0.7 percent, as inflation data weakened and interest rates fell in July. Sub-strategy performance was led by the HFRI RV: FI-Sovereign Index, which advanced 0.4 percent for the month, while the investable HFRI 500 RV: FI-Corporate Index added 0.2 percent. Total capital invested in Relative Value Arbitrage strategies surged to surpass $1 trillion as of mid-year 2021.

Risk Premia and Liquid Alternatives posted mixed performance in July, with gains in Multi-Asset exposures offset by declines in Rates. The HFR BSRP Multi-Asset Index gained 9.25 percent for the month, while the HFR BSRP Rates Index fell 1.52 percent. The HFRI-I Liquid Alternatives Index fell 0.3 percent in July, with a gain of 0.83 percent in the HFRI-I Macro Index being offset by a decline of 1.29 percent in the HFRI-I Event Driven Index.

The HFRI Diversity Index advanced +0.6 percent in July, while the HFRI Women Index posted a narrow decline of -0.6 percent.

“Hedge funds navigated a volatile market environment in July with mixed performance across sub-strategies and narrow declines across broad-based indices as, despite strong corporate earnings, investors focused on increased uncertainty surrounding renewed focus on the spread of virus variants,” says Kenneth Heinz, president of HFR. “The evolving macroeconomic environment continues to be fluid with reflationary, expansionary trends subject to sharp reversals and falling rates and inflation expectations.

“Hedge funds remain tactically positioned for these shifts, with high realised equity market volatility, oscillating between record highs and sharp correction cycles within intra-month, or even shorter, market cycles,” he adds. “Hedge funds which have adapted and adjusted to these powerful trends are likely to lead industry performance and growth in the second half of 20H21.”