Macro Up Again as Hedge Funds Mixed in May
Posted by Colin Lambert. Last updated: June 13, 2023
Macro hedge funds again managed to eke out gains amidst a much tougher environment for hedge funds generally, according to the latest data published by indexation and analytics firm HFR, during the month, approximately 40% of hedges funds were in the black.
The overall HFRI 500 Fund Weighted Composite Index was -0.2% (estimated) in May as managers navigated banking, energy and (primarily positive) technology volatility. Performance was led by Relative Value Arbitrage and Macro strategies. The HFRI Fund Weighted Composite Index (FWC) also declined 0.2%, as modest gains in Relative Value strategies were offset by declines in Event-Driven strategies.
Macro performance was led by quantitative, trend-following CTA strategies, as volatility evolved and uncertainty remained regarding the near-term path of interest rates. The investible HFRI 500 Macro Index gained 0.3 % for the month, although the HFRI Macro (Total) Index fell 0.16%. The HFRI 500 Macro: Systematic Diversified Index advanced 0.9%, while the HFRI 500 Trend Following Index added 0.5%.
Fixed income-based, interest rate-sensitive strategies led performance in May, as regional banking volatility subsided following the closure and acquisition of First Republic Bank, while uncertainty about the near-term path of US interest rates remained uncertain. The HFRI 500 Relative Value Index gained an estimated 0.4% for the month, while the HFRI Relative Value (Total) Index eked out a 0.05% (estimated) gain. Leading sub-strategy performance, the HFRI 500 RV: Volatility Index was up 0.7%, while the HFRI RV: Fixed Income-Convertible Arbitrage Index added 0.6%.
Performance dispersion widened in May, as the top decile of the HFRI FWC constituents advanced by an average of 6.7%, while the bottom decile fell by an average of -7.1%. This represents a top/bottom dispersion of 13.8% for the month, up from 10.9% in April.
“Hedge funds posted mixed performance in May as financial market volatility shifted from regional banks early in the month towards energy and commodity weakness, and positive contributions from technology exposures in late May and continuing into June,” says Kenneth Heinz, president of HFR. “Managers also navigated volatility associated with negotiations on debt ceiling increases and spending legislation, with increased uncertainty regarding the near-term path of interest rates and possibility of US recession in 2023, with leading strategy performance from interest rate sensitive relative value arbitrage, shareholder activist and technology exposures.
“Looking into the second half of 2023, managers are positioning for a complex bifurcation of macroeconomic and geopolitical risks, including scenarios which are accreditive to current financial market volatility or constructive to overall directional market trends, including the powerful and explosive trends in AI-exposures,” he continues. “Uncertainty and tensions between these risks and outcomes is likely to dominate financial market and hedge fund performance in the coming months, with increased potential for destabilising dislocations. Institutional investors interested in specialised exposures to these trends, while also providing capital protection, are likely to increase commitments to managers which have demonstrated their strategy’s robustness and veracity in the first half of the year.”