Macro Back in the Hedge Fund Box Seat in April
Posted by Colin Lambert. Last updated: May 12, 2023
After a challenging month, Macro strategies bounced back strongly during the market turmoil of April to lead hedge fund performance once again.
Hedge fund indexation and analysis firm HFR says the HFRI 500 Fund Weighted Composite Index rose +0.4% (estimated) in April, as managers effectively navigated the recent surge in banking volatility with performance gains. The HFRI Fund Weighted Composite Index (FWC) also gained an estimated +0.4% for the month, led by Macro and Equity strategies.
Uncorrelated Macro, led by fundamental, discretionary Macro strategies and complemented by quantitative, trend-following CTA strategies, led the way with the investible HFRI 500 Macro Index rising 1.2% for the month, while the investable HFRI 400 (US) Macro Index advanced +0.7% (estimated). The HFRI 500 Trend Following Index jumped 1.6% in April, while the HFRI 500 Macro: Discretionary Thematic Index added 0.3%.
Performance dispersion narrowed in April, as the top decile of the HFRI FWC constituents advanced by an average of +5.5%, while the bottom decile fell by an average of -4.4%, representing a top/bottom dispersion of only 9.9% for the month. By comparison, the dispersion in March performance was 18.3%. Nearly half of hedge funds posted positive performance in April.
Fixed income-based, interest rate-sensitive strategies also posted gains in April, as the Federal Reserve prepared to raise interest rates and regional bank risk accelerated; the HFRI 500 Relative Value Index gained an estimated +0.1% for the month, while the HFRI Relative Value (Total) Index advanced +0.25% (estimated). Leading sub-strategy performance, the HFRI RV: Yield Alternatives Index rose 1.4 % in April, while the HFRI RV: Fixed Income-Asset Backed Index added 0.8%.
“Hedge fund managers have continued to navigate the surge in bank and financial risk volatility, with historic dislocations, chaotic, frenzied trading and structural uncertainty conditions unlike anything since 2008, or possibly even prior to that,” says Kenneth Heinz, president of HFR. “Given this surge in volatility, comparable in magnitude to 2008, the worst year in the history of HFRI performance, managers posted gains in May across a range of equity, credit and trading oriented strategies as weakness and risk concentrated in regional banks dominated financial market conditions, culminating with the closure and sale of First Republic Bank.
“Financial risk has accelerated into May with managers positioning opportunistically for additional structural dislocations and fluid developments within the regional bank trading environment or more broadly, positioning through the record rate of interest rate increases, possibly peaking inflation, and uncertainty with regard to US and global economic growth in 2023,” he adds. “Once again, institutions are likely to allocate or increase allocations to managers demonstrating both the defensive capital preservation and specialised, opportunistic exposure to these historic financial market developments.”