HFS Bulletin
Monthly hedge fund update – July 2024
Market and hedge fund update in a nutshell
Risk assets trended mostly higher in July, continuing the rally that began in Q4 2023. There was greater dispersion within and across asset classes due to sector rotation within the equity space and divergent monetary policy expectations among G7 nations. In Equity Hedged, US Equity Hedged strategies generated mixed returns. The rotation that occurred during the month resulted in a significant amount of sector dispersion. European Equity Hedged strategies generated mixed returns. Alpha generation for fundamental European funds was mixed as beta drove much of the broader long / short manager performance across the industry. Asian Equity Hedged strategies generally produced negative returns. Most of the losses were incurred from China, Japan and AI-related themes. In Relative Value, Fixed income relative value strategies generally produced positive returns. Directional positions, such as short positions in Japan and long positions in the US, were generally additive to performance. Capital structure / volatility arbitrage strategies generally produced positive returns. Notable results were seen in the convertible arbitrage space. Merger arbitrage and event-driven strategies generally produced positive returns. Newly announced soft catalyst event situations (the pre-event, activist, spins category) outperformed. Agency MBS strategies generally produced positive returns. Gains were primarily attributable to carry. Quantitative equity strategies generated mixed returns. There was relatively muted performance across the market neutral cohort during the month. In Credit/Income, Corporate credit strategies generally produced positive returns. During the month, returns were primarily attributable to carry and mark-to-market gains due to the rate rally. Asset-backed strategies (ABS) generally produced positive returns. Long positions were typically the key contributor to performance as returns were primarily attributable to carry. Reinsurance / ILS strategies generally produced positive returns. July was essentially a no-loss month for both catastrophe bond and collateralized reinsurance managers. In Trading, Discretionary trading strategies generally produced positive returns. Overall, Developed Market (DM) macro strategies were mostly positive during the month. Within rates, positive contribution was from receivers/steepening trades and Japan short exposure. Systematic trading strategies generally produced negative returns. Losses in trend-following strategies were concentrated in fixed income and currencies. In general, agriculture and credit exposure provided offsetting gains.
Index | Index | Jul-24 | Jul-24 | Jun-24 | Jun-24 | May-24 | May-24 | QTD | QTD | YTD | YTD | 1Y Annualized Return | 1Y Annualized Return | 3Y Annualized Return | 3Y Annualized Return | 5Y Annualized Return | 5Y Annualized Return | 10Y Annualized Return | 10Y Annualized Return | Volatility (10Y) | Volatility (10Y) |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Index | MSCI World Total Return - Net USD | Jul-24 | 1.76 | Jun-24 | 2.03 | May-24 | 4.47 | QTD | 1.76 | YTD | 13.72 | 1Y Annualized Return | 18.34 | 3Y Annualized Return | 6.85 | 5Y Annualized Return | 12.06 | 10Y Annualized Return | 9.53 | Volatility (10Y) | 15.01 |
Index | FTSE US Broad Investment-Grade Bond Index | Jul-24 | 2.36 | Jun-24 | 0.93 | May-24 | 1.71 | QTD | 2.36 | YTD | 1.62 | 1Y Annualized Return | 5.12 | 3Y Annualized Return | -2.71 | 5Y Annualized Return | 0.19 | 10Y Annualized Return | 1.61 | Volatility (10Y) | 4.94 |
Index | Barclays Global High Yield Index | Jul-24 | 1.96 | Jun-24 | 0.40 | May-24 | 1.49 | QTD | 1.96 | YTD | 5.21 | 1Y Annualized Return | 11.83 | 3Y Annualized Return | 1.15 | 5Y Annualized Return | 2.99 | 10Y Annualized Return | 3.67 | Volatility (10Y) | 8.61 |
Index | Bloomberg Commodity Index Total Return | Jul-24 | -4.04 | Jun-24 | -1.54 | May-24 | 1.76 | QTD | -4.04 | YTD | 0.90 | 1Y Annualized Return | -5.17 | 3Y Annualized Return | 3.58 | 5Y Annualized Return | 6.51 | 10Y Annualized Return | -1.19 | Volatility (10Y) | 14.15 |
Index | ICE BofA Merrill Lynch 3-month T-Bill Total Return | Jul-24 | 0.45 | Jun-24 | 0.41 | May-24 | 0.48 | QTD | 0.45 | YTD | 3.09 | 1Y Annualized Return | 5.45 | 3Y Annualized Return | 3.18 | 5Y Annualized Return | 2.21 | 10Y Annualized Return | 1.56 | Volatility (10Y) | 0.52 |
Index | HFRI Fund of Funds Composite Index | Jul-24 | 0.45 | Jun-24 | 0.24 | May-24 | 0.81 | QTD | 0.45 | YTD | 5.29 | 1Y Annualized Return | 7.98 | 3Y Annualized Return | 2.49 | 5Y Annualized Return | 4.86 | 10Y Annualized Return | 3.57 | Volatility (10Y) | 4.98 |
Index | HFRI Equity Hedge (Total) Index | Jul-24 | 1.50 | Jun-24 | 0.20 | May-24 | 2.39 | QTD | 1.50 | YTD | 7.77 | 1Y Annualized Return | 10.88 | 3Y Annualized Return | 2.88 | 5Y Annualized Return | 8.09 | 10Y Annualized Return | 5.86 | Volatility (10Y) | 8.73 |
Index | HFRI Event-Driven (Total) Index | Jul-24 | 2.99 | Jun-24 | 0.09 | May-24 | 1.56 | QTD | 2.99 | YTD | 5.92 | 1Y Annualized Return | 11.67 | 3Y Annualized Return | 4.29 | 5Y Annualized Return | 6.82 | 10Y Annualized Return | 4.87 | Volatility (10Y) | 7.17 |
Index | HFRI ED: Credit Arbitrage Index | Jul-24 | 0.13 | Jun-24 | 0.09 | May-24 | 1.26 | QTD | 0.13 | YTD | 6.23 | 1Y Annualized Return | 11.60 | 3Y Annualized Return | 5.19 | 5Y Annualized Return | 5.81 | 10Y Annualized Return | 5.09 | Volatility (10Y) | 6.87 |
Index | HFRI Macro (Total) Index | Jul-24 | -0.60 | Jun-24 | -1.37 | May-24 | -0.30 | QTD | -0.60 | YTD | 4.80 | 1Y Annualized Return | 4.62 | 3Y Annualized Return | 4.41 | 5Y Annualized Return | 5.31 | 10Y Annualized Return | 3.51 | Volatility (10Y) | 4.76 |
Index | HFRI Macro (Total) Systematic Diversified Index | Jul-24 | -1.60 | Jun-24 | -1.47 | May-24 | -1.03 | QTD | -1.60 | YTD | 6.12 | 1Y Annualized Return | 2.81 | 3Y Annualized Return | 4.04 | 5Y Annualized Return | 4.35 | 10Y Annualized Return | 3.16 | Volatility (10Y) | 7.76 |
Index | HFRI Relative Value (Total) Index | Jul-24 | 0.93 | Jun-24 | 0.59 | May-24 | 0.70 | QTD | 0.93 | YTD | 4.96 | 1Y Annualized Return | 8.48 | 3Y Annualized Return | 4.11 | 5Y Annualized Return | 4.71 | 10Y Annualized Return | 4.04 | Volatility (10Y) | 4.40 |
Overall market commentary
Risk assets trended mostly higher in July, continuing the rally that began in Q4 2023. There was greater dispersion within and across asset classes due to sector rotation within the equity space and divergent monetary policy expectations among G7 nations. However, moderating inflation and some cooling of economic momentum in the US were the focus for many market participants. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced mixed performance of 4.41%, 1.13% and -0.75%, respectively, as the growth to value rotation proved to be a dominant theme. Across Europe, equity market performance was generally positive and in line with the broader risk-on theme. The MSCI Europe, DAX and FTSE generated positive performance of 1.11%, 1.50% and 3.06%, respectively. Asian developed markets produced negative results with the Nikkei 225 weaker by 1.22%, challenged by expectation of tighter policy and a stronger Yen. Emerging markets again generated mixed performance in July as Indian and Brazilian markets rallied 3.47% and 3.02%, respectively. Conversely, Chinese shares weakened by -0.97%. US interest rate markets were modestly stronger on the back of moderating inflation data and expectations for a September rate cut by the US Federal Reserve Bank. The two-year US Treasury yield fell to 4.26% from 4.76% and the ten-year US Treasury yield decreased to 4.03% from 4.40%. The Barclays US Corporate Investment Grade Index rose 2.38% in July, driven in large part by the rally in Treasury yields. Similarly, the Barclays US Corporate High Yield Index gained 1.94%, where carry income and lower yields drove performance. Commodity prices were mostly lower in July as economic activity was seen to slow in recent weeks. Gold bucked the trend and was stronger by 3.7%, while crude oil weakened by 3.4%. In currency markets, the Euro rose 0.83% against the US dollar from 1.0735 to 1.0824, while the US dollar fell 3.87% against the Japanese yen from 160.83 to 154.60.
US Equity Hedged strategies generated mixed returns in July. The rotation that occurred during the month resulted in a significant amount of sector dispersion. The rotation, driven in large part by the tepid CPI print was the catalyst for a pronounced shift into cyclical and small capitalization stocks that began mid-month. This lasted for several weeks before stocks started to exhibit more correlation; the broader market moved higher in unison on the final day of the month as confidence increased for a Fed cut at the September meeting. Industrials and utilities outperformed, while technology was a material underperformer, driven by AI-related selling. July was a weaker alpha month that was compounded by a material amount of de-grossing. Manager performance was highly variable, but managers that performed the best during H1 typically experienced the weakest results in July.
European Equity Hedged strategies generated mixed returns in July. Alpha generation for fundamental European funds was mixed as beta drove much of the broader long / short manager performance across the industry. Momentum and concentrated long positions offset alpha generation in industrials and concentrated short positions. Energy funds generated positive value add for the platform, while generalist funds typically produced mixed returns; those with higher exposure to semiconductor names lagged the index. By sector, technology, consumer discretionary, and miners were challenged with notable weakness in semiconductor and luxury names, while utilities, renewables, and telecommunications outperformed. Factor wise, dividend yield and value names benefited, while quality, growth, and momentum lagged.
Asian Equity Hedged strategies generally produced negative returns in July. Most of the losses were incurred from China, Japan and AI-related themes. After hitting an all-time high in early July, the Japanese market experienced high volatility driven by weak data points in the US as well as a hawkish BoJ, resulting in a sharp sell-off in equities. The market was characterized by strong dispersion among sectors where financials and banks benefited from the rate hike, while export-related sectors were challenged. In China, the market was driven by accelerated US election risk in the early part of the month, followed by a more benign Politburo meeting where China continues to stick to a conservative policy approach.
HFRI Equity Hedge Total Index:
MTD 1.50%
QTD 1.50%
YTD 7.77%
Fixed income relative value strategies generally produced positive returns in July. Directional positions, such as short positions in Japan and long positions in the US, were generally additive to performance. Micro bond RV and basis trading were also mostly positive in the US and Japan. Positioning in EU basis generally remains very light. Regarding swap spread trading, performance was mixed depending on manager positioning. European country spreads narrowed, giving back some of the gains from the previous month. Inflation trading was generally more challenged during the month and tail hedges, such as front-end wideners and credit hedges, also detracted from performance.
Capital structure / volatility arbitrage strategies generally produced positive returns in July. Notable results were seen in the convertible arbitrage space. Softer inflation data, tighter credit and rallying equity prices provided a positive tailwind for convertibles. In contrast, rate hedges detracted from performance. New issuance was strong, particularly from Asia, for the third month in a row. Global convertible bond issuance volumes totaled USD 8.6bn in July. Asia led with USD 5.2bn of issuance volume, USD 3.5bn of which came from Ping An Insurance Group’s issue. The US priced slightly below USD 2.0bn for the month, followed by Japan at USD 851m and Europe at USD 619m. Year-to-date, the global market has priced USD 69bn, a year-over-year increase of +60%.
Merger arbitrage and event-driven strategies generally produced positive returns in July. Newly announced soft catalyst event situations (the pre-event, activist, spins category) outperformed. Additionally, the US merger arbitrage spread pool finished July at approximately USD 25bn, a -15% month-over-month tightening across the board. Global M&A activity volumes this year reached USD 1.9tn as of the end of July, which is 16% higher year-over-year. In North America dealmaking activity increased; the region represented 61% of the global yearly volume in 2024. Equity capital markets managers also posted generally positive returns last month. USD 53bn of ECM activity was brought to the market in July. US YTD activity levels were 60% higher year-over-year, while EMEA and Japan volumes were 30% higher each. In Japan, there was USD 5.5bn of follow-on activity, including deals, such as Honda Motors, Kokusai Electric and Asics.
Agency MBS strategies generally produced positive returns in July. Gains were primarily attributable to carry. Managers benefited from stable fundamentals in the strategy although the early August rate and risk asset volatility likely caused month-end marks to be lower compared to trade prints observed during most of the month.
Quantitative equity strategies generated mixed returns in July. There was relatively muted performance across the market neutral cohort during the month. Short- and medium-term models appeared to outperform long-term models, as the sudden reversal was easier to be captured by flow/technical driven quants, whereas defensive (low beta, high quality) models were challenged. A general sell-off in momentum across different durations also weighed on performance. Conversely, reversal models posted positive returns with statistical arbitrage and liquidity provision strategies to have monetized the spike in volatility. Sector tilt (mainly financials), short crowdedness, asset selection, volatility, and short-term momentum factors were among the largest alpha contributors in July, which were offset by losses from medium-term momentum, earnings yield, and long crowdedness.
HFRI Relative Value Total Index:
MTD 0.93%
QTD 0.93%
YTD 4.96%
Corporate credit strategies generally produced positive returns in July. During the month, returns were primarily attributable to carry and mark-to-market gains due to the rate rally. Spreads were marginally wider for the month in corporate credit, while structured credit marginally outperformed.
Asset-backed strategies (ABS) generally produced positive returns in July. Long positions were typically the key contributor to performance as returns were primarily attributable to carry. However, select assets (CLOs, non-agency RMBS) also produced higher total returns. In addition, investments in CRT, multifamily CMBS, and short duration residential credit were also additive to performance.
Reinsurance / ILS strategies generally produced positive returns in July. July was an essentially a no-loss month for both catastrophe bond and collateralized reinsurance managers. As a result, the primary driver of returns was premium income although tightening spreads also contributed to catastrophe bond returns. We are now in the season where returns are expected to continue increasing in the absence of events as catastrophe bond spreads typically tighten throughout the hurricane season as there is less remaining time for storms to occur, while collateralized reinsurance managers accrue more of the premium income in response to the higher level of risk during the upcoming months.
HFRI ED: Credit Arbitrage Index
MTD 0.13%
QTD 0.13%
YTD 6.23%
Discretionary trading strategies generally produced positive returns in July. Overall, Developed Market (DM) macro strategies were mostly positive during the month. Within rates, positive contribution was from receivers/steepening trades and Japan short exposure. Some managers also produced gains from trading short EUR swap spreads and country spread tighteners, taking advantage of French elections related dislocations. FX was generally a detractor due to long USD bias, particularly vs. CNH, and in some cases JPY. Equally, some EM carry trades underperformed. Equity trading was also mostly a detractor, especially those who had a long bias in US technology and Japan. However, some managers produced gains from trading volatility. Commodities were more mixed. Some incurred losses on copper and oil positions, while some managers produced gains from long gold positions. Within Emerging Market (EM) strategies, managers generally produced positive returns. Most of the gains were produced from EM receivers, which was offset from DM rates risk, including payers in the US rates but also hedges in credit and equity. Some managers produced small gains from Japan short exposure.
Systematic trading strategies generally produced negative returns in July. Losses in trend-following strategies were concentrated in fixed income and currencies. In general, agriculture and credit exposure provided offsetting gains. During the month, equities produced relatively flat returns. Alternative market managers’ losses were mostly in currencies, energy, and fixed income. Systematic managers with a more diversified alpha models incurred losses from rates, currencies and energy, while equities and agriculture positions produced gains.
HFRI Macro Total Index:
MTD -0.60%
QTD -0.60%
YTD 4.80%
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