Strong Start to 2023 for Hedge Funds

In contrast to a tricky 2022 for many strategies, hedge funds had a strong start to the year according to indexation and analytical firm HFR, whose Fund Weighted Composite Index rose 2.8% in January.

The rise was driven by serial 2022 under-performers, directional equity and event-driven hedge funds. The HFRI Equity Hedge Index rose 4.3%, while the HFRI Event-Driven (Total) Index was up 3.55%.

Also in contrast to much of last year, macro funds had a mixed month, with the HFRI 500 Macro Index posting a narrow decline of 0.17% for the month after rising 14.35% in 2022. HFR says declines in quantitative, trend-following CTA strategies offset gains in Fundamental Discretionary Macro.

Completing the contrarian performance, the HFR Cryptocurrency Index leapt 27.3% in January, after a 2022 decline of 54%, as cryptocurrency values leapt for the month while realised volatility remained elevated. The HFR Risk Parity Index also surged in January with the HFR Risk Parity Vol 15 Index gaining 8.3%, also paring the 2022 decline of 30.75%.

It was a more normal picture for fixed income-based, interest rate-sensitive strategies, which also advanced in January, as investors positioned for a moderation of inflationary pressures and interest rate increases. The investable HFRI 500 Relative Value Index was up 1.7% for the month, with sub-strategy performance led by the HFRI 500 RV: Fixed Income-Asset Backed Index (+4.2%); the HFRI 500 RV: Multi-Strategy Index (+2.8%); and the HFRI 500 RV: FI-Corporate Index (+2.25%).

The top decile of the Fund Weighted Composite Index constituents advanced by an average of +12.5%, while the bottom decile fell by an average of -4.0%, representing a top/bottom dispersion of 16.5%. Approximately three-quarters of hedge funds posted positive performance in January, HFR says.

“Hedge funds surged to begin 2023 as investor risk on sentiment drove gains across directional equity and event driven strategies, and as equity markets jumped on early signs of moderating generational inflation and slowing pace of interest rate increases by the US Federal Reserve,” says Kenneth Heinz, president of HFR. “In contrast to 2022, leading exposures include Shareholder Activist, Special Situations, Cryptocurrency and Fundamental Equity.

“While the macroeconomic and geopolitical environment remains extremely fluid, volatile and reactive to new economic data, sometimes overreacting, the industry has posted broad-based gains and exhibited strong, defensive capital preservation through transitional periods of shifting drivers of performance,” he continues. “It is likely that these intense, dynamic, micro-cycles of performance will dominate 1H23 as fund managers and investors adjust to new paradigms of inter- and intra-market correlations; managers who are positioned to navigate these specialised opportunities will lead industry growth in 2023.”