HFS Bulletin
Monthly hedge fund update – March 2024
Executive summary
Executive summary
Market and hedge fund update in a nutshell
Risk assets extended their upward trend in March as many investors continued to discount somewhat higher than expected inflation prints and instead focused on the resilience of the underlying economy and the powerful trend across technology broadly and AI specifically.
In Equity Hedged, US Equity Hedged strategies generally produced positive returns in March. At the industry level, managers’ net exposures were a significant determinant of returns as long / short spread was marginally positive during the month. European Equity Hedged strategies generally produced positive returns in March. Managers’ alpha was generally positive compared to the MSCI Europe, with most funds having positive absolute returns for the month across generalists and sector specialists. Asian Equity Hedged strategies generally produced positive returns in March. Markets in Japan continued to trade higher while in China the markets largely stabilized.
In Relative Value, Fixed income relative value strategies generally produced positive returns in March. Cash / futures basis trading produced mixed results as managers have reduced risk, and most are running with high unencumbered cash levels. Capital structure / volatility arbitrage strategies generally produced positive returns in March. During the month, equity and credit rallied, driven by optimism around the state of the economy and potential interest rate cuts. Merger arbitrage and event-driven strategies generated mixed returns in March. The median ongoing merger arbitrage spreads narrowed by approximately 70bps. Agency MBS strategies produced positive returns in March. Quantitative equity strategies generally produced positive returns in March. Crowding signals worked positively during the month, although momentum moderated toward the end of the period.
In Credit / Income, Corporate credit strategies generally produced positive returns in March. Managers generally benefited from tightening credit spreads and stable interest rates. The corporate long / short sub-strategy performed well as every manager held by HFS products in this space produced a positive return.
At the asset class level Asset-backed strategies generally produced positive returns in March. Like prior months, the sub-strategy primarily benefited from carry income. Reinsurance / ILS strategies generally produced positive returns in March. The month was essentially a no-loss month for both cat bond and collateralized reinsurance managers. As a result, the primary driver of returns was premium income.
In Trading, Discretionary trading strategies generally produced positive performance in March. Developed macro managers were mostly positive with notable contribution from long equity positions (US / Japan and energy transition) and long commodity positions (gold and copper).
Systematic trading strategies generally produced positive returns in March. Trend-following strategies were profitable via themes in equities, FX, agriculture (long cocoa), while losses were generated by fixed income and metals exposures. Energy expressions achieved gains from long oil and short natural gas positions.
Index | Index | Mar-24 | Mar-24 | Feb-24 | Feb-24 | Jan-24 | Jan-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 | Mar-24 | 3.21 | Feb-24 | 4.24 | Jan-24 | 1.20 | QTD | 8.88 | YTD | 8.88 | 1Y Annualized Return | 25.11 | 3Y Annualized Return | 8.60 | 5Y Annualized Return | 12.07 | 10Y Annualized Return | 9.39 | Volatility (10Y) | 14.91 |
Index | FTSE US Broad Investment-Grade Bond Index | Mar-24 | 0.85 | Feb-24 | -1.41 | Jan-24 | -0.26 | QTD | -0.84 | YTD | -0.84 | 1Y Annualized Return | 1.62 | 3Y Annualized Return | -2.53 | 5Y Annualized Return | 0.36 | 10Y Annualized Return | 1.54 | Volatility (10Y) | 4.81 |
Index | Barclays Global High Yield Index | Mar-24 | 1.51 | Feb-24 | 0.79 | Jan-24 | -0.19 | QTD | 2.13 | YTD | 2.13 | 1Y Annualized Return | 12.91 | 3Y Annualized Return | 1.20 | 5Y Annualized Return | 3.07 | 10Y Annualized Return | 3.53 | Volatility (10Y) | 8.60 |
Index | Bloomberg Commodity Index Total Return | Mar-24 | 3.31 | Feb-24 | -1.47 | Jan-24 | 0.40 | QTD | 2.19 | YTD | 2.19 | 1Y Annualized Return | -0.56 | 3Y Annualized Return | 9.11 | 5Y Annualized Return | 6.38 | 10Y Annualized Return | -1.56 | Volatility (10Y) | 14.18 |
Index | ICE BofA Merrill Lynch 3-month T-Bill Total Return | Mar-24 | 0.45 | Feb-24 | 0.41 | Jan-24 | 0.43 | QTD | 1.29 | YTD | 1.29 | 1Y Annualized Return | 5.24 | 3Y Annualized Return | 2.58 | 5Y Annualized Return | 2.02 | 10Y Annualized Return | 1.38 | Volatility (10Y) | 0.48 |
Index | HFRI Fund of Funds Composite Index | Mar-24 | 1.62 | Feb-24 | 1.77 | Jan-24 | 0.73 | QTD | 4.17 | YTD | 4.17 | 1Y Annualized Return | 9.68 | 3Y Annualized Return | 2.88 | 5Y Annualized Return | 5.00 | 10Y Annualized Return | 3.59 | Volatility (10Y) | 4.99 |
Index | HFRI Equity Hedge (Total) Index | Mar-24 | 2.10 | Feb-24 | 3.06 | Jan-24 | -0.05 | QTD | 5.17 | YTD | 5.17 | 1Y Annualized Return | 14.25 | 3Y Annualized Return | 3.25 | 5Y Annualized Return | 7.93 | 10Y Annualized Return | 5.72 | Volatility (10Y) | 8.71 |
Index | HFRI Event-Driven (Total) Index | Mar-24 | 1.83 | Feb-24 | 0.74 | Jan-24 | -0.06 | QTD | 2.52 | YTD | 2.52 | 1Y Annualized Return | 11.67 | 3Y Annualized Return | 4.07 | 5Y Annualized Return | 6.44 | 10Y Annualized Return | 4.70 | Volatility (10Y) | 7.12 |
Index | HFRI ED: Credit Arbitrage Index | Mar-24 | 1.15 | Feb-24 | 1.12 | Jan-24 | 2.22 | QTD | 4.56 | YTD | 4.56 | 1Y Annualized Return | 12.60 | 3Y Annualized Return | 5.52 | 5Y Annualized Return | 6.13 | 10Y Annualized Return | 5.10 | Volatility (10Y) | 6.87 |
Index | HFRI Macro (Total) Index | Mar-24 | 3.17 | Feb-24 | 2.39 | Jan-24 | 0.55 | QTD | 6.22 | YTD | 6.22 | 1Y Annualized Return | 8.51 | 3Y Annualized Return | 6.06 | 5Y Annualized Return | 6.40 | 10Y Annualized Return | 3.75 | Volatility (10Y) | 4.71 |
Index | HFRI Macro (Total) Systematic Diversified Index | Mar-24 | 3.81 | Feb-24 | 4.52 | Jan-24 | 0.81 | QTD | 9.39 | YTD | 9.39 | 1Y Annualized Return | 10.00 | 3Y Annualized Return | 6.44 | 5Y Annualized Return | 6.22 | 10Y Annualized Return | 3.61 | Volatility (10Y) | 7.70 |
Index | HFRI Relative Value (Total) Index | Mar-24 | 0.99 | Feb-24 | 0.82 | Jan-24 | 0.65 | QTD | 2.48 | YTD | 2.48 | 1Y Annualized Return | 8.16 | 3Y Annualized Return | 4.14 | 5Y Annualized Return | 4.60 | 10Y Annualized Return | 4.03 | Volatility (10Y) | 4.40 |
Strategy performance
Strategy performance
Monthly hedge fund review
Monthly hedge fund review
Overall market commentary
Risk assets extended their upward trend in March as many investors continued to discount somewhat higher than expected inflation prints and instead focused on the resilience of the underlying economy and the powerful trend across technology broadly and AI specifically. The extension of the market rally occurred despite the forecasted interest cuts from the US Federal Reserve being pushed out by several months. Market breadth also expanded in March to include more than the “Magnificent Seven” and momentum themes. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced positive performance of 2.08%, 3.10% and 1.79%, respectively. Across Europe, equity market performance was also broadly positive with the MSCI Europe, DAX and FTSE generating positive performance of 3.53%, 4.61% and 4.20%, respectively. Asian developed markets produced positive performance with the Nikkei 225 Index rising 3.07%, supported further by a weakening Japanese yen. Emerging markets generated mostly positive results in March despite tempered expectations for rate cuts. Indian and Chinese equity markets produced gains of 1.59% and 0.86%, respectively, while Brazilian shares eased 0.71%. US interest rate markets were little changed last month after the back up in yields during February. The two-year US Treasury yield fell to 4.59% from 4.62% and the ten-year US Treasury yield decreased to 4.20% from 4.25%. The Barclays US Corporate Investment Grade Index rallied 1.29% in March, benefitting from carry income and a stable interest rate landscape. Similarly, the Barclays US Corporate High Yield Index rose 1.18%, driven by carry income and the modest rally in rates. Commodity prices were mostly higher last month, reflecting a strong global economy, with crude oil rising 6.2% and gold advancing 8.9%. In currency markets, the Euro fell 0.17% against the US dollar to 1.0787 from 1.0805, while the US dollar rallied another 1.13% against the Japanese yen from 149.64 to 151.34.
Equity Hedged
Equity Hedged
US Equity Hedged strategies generally produced positive returns in March. At the industry level, managers’ net exposures were a significant determinant of returns as long / short spread was marginally positive during the month. Crowded long positions slightly outperformed the broader market. Alpha generated from HFS managers was generally stronger than implied by industry statistics as most managers produced both positive returns and value-add during the month. Idiosyncratic stock losses were typically responsible for the negative performance realized by a handful of managers. March represented another strong month across US equity markets with continued broadening as smaller cap and value stocks assumed leadership, especially later in the month. Performance was strongest across the energy and materials sectors, helped by higher commodity prices, while technology and consumer discretionary stocks lagged. In contrast to earlier in the year, the quality and growth factors were notable detractors, while the momentum factor was also a laggard.
European Equity Hedged strategies generally produced positive returns in March. Managers’ alpha was generally positive compared to the MSCI Europe, with most funds having positive absolute returns for the month across generalists and sector specialists. For generalists, positions in industrials, such as miners and semiconductors generally performed well. Sector wise, markets rewarded industrials, energy, and financials, while consumer discretionary and semiconductors lagged. Miners, real estate, energy, oil, and renewables indices were positive for the month, while semiconductors, luxury, and travel & leisure incurred losses. In terms of factors, growth and value stocks out-performed, and momentum performed well, while quality lagged. Some prime brokers reported that March experienced the fifth consecutive month of EU equities being “net bought” and was the most net bought region over the month. This was driven primarily by adds on the long side to mega cap names. The most net bought sectors were consumer staples and information technology, whereas the most “net sold” sectors were materials and consumer discretionary.
Asian Equity Hedged strategies generally produced positive returns in March. During the month, markets in Japan continued to trade higher. The move higher in Japan continued despite the BoJ’s announcement to exit negative interest rate policy (NIRP). In terms of factors, momentum and size continued to perform along with growth, quality, and low risk. In China, the markets largely stabilized despite the disappointment that China did not announce large scale stimulus during the NPC. Nonetheless, stronger earnings reports as well as continued support from the national team proved beneficial.
HFRI Equity Hedge Total Index:
MTD 2.10%
QTD 5.17%
YTD 5.17%
Relative Value
Relative Value
Fixed income relative value strategies generally produced positive returns in March. Cash / futures basis trading produced mixed results as managers have reduced risk, and most are running with high unencumbered cash levels. Inflation relative value themes added to gains for some managers. In addition, the short European swap spread theme started to reverse which challenged some managers; however, their exposures had previously been reduced which dampened losses. Cross-currency basis and tenor basis swap strategies were generally challenged over the month, while macro related strategies were mostly flat or mixed.
Capital structure / volatility arbitrage strategies generally produced positive returns in March. During the month, equity and credit rallied, driven by optimism around the state of the economy and potential interest rate cuts. The environment proved supportive of the US convertibles’ performance and new issuance. Globally, new convertible bond issuance was USD 10.8bn, USD 10.4bn of which were offered by the US issuers, which is the most since March 2021. An increase in convertible bond issuance volumes (USD 25bn globally YTD, with USD 21bn coming from the US) was to a certain extent driven by refinancings, which created additional alpha generating opportunities for holders of the repurchased convertible debt. Notably, the new supply was well received and digested by the market. In March, non-investment grade convertible bond spreads tightened 53bps to 509bps, and the spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index decreased to 243bps from 278bps last month.
Merger arbitrage and event-driven strategies generated mixed returns in March. The median ongoing merger arbitrage spreads narrowed by approximately 70bps. While most deal spreads experienced positive momentum, US Steel was a significant outlier (-14%) after President Biden issued a statement opposing the Nippon acquisition. Therefore, the deal detracted from the returns for managers who had exposure. Four of the five largest underperformers from February – Albertsons, Olink, Ansys, and Cerevel Therapeutics, were among the top performers in March. In terms of new deal announcements, after an active start to the year, M&A activity slowed in March with only two public deals over USD 1bn announced. Q1 2024 transaction volume was up +32% year-over-year but down compared to Q4 2023. Deal size distribution displayed a significant skew to mid-size deals, with average deal value decreasing to USD USD 5.6bn fromUSD 7.0bn in Q4 2023. Equity capital markets were also active, with a few highly anticipated deals coming to the market, such as Reddit, Astera Labs, and Galderma. Activity level-wise, March marked the quickest start to global ECM issuance since 2018 and the fastest in the US since 2015, excluding 2021.
Overall, agency MBS strategies produced positive returns in March. Funds generated positive results during the month, although dispersion was somewhat elevated. Carry income was the largest driver of performance, while some funds also generated positive total returns from long investments. Mortgage derivatives continued to benefit from slow prepayment speeds. Conversely, some managers were adversely impacted by relative value trades that underperformed.
Quantitative equity strategies generally produced positive returns in March. Crowding signals worked positively during the month, although momentum moderated toward the end of the period. Volatility and quality provided headwinds for managers, while size was generally accretive. The quant equity market neutral cohort was also positive, driven mainly by positive alpha. Asset selection and crowdedness (both long and short) were by far the largest alpha contributors in March, while these gains were partially offset by losses from China, volatility, profitability, and dividend yield.
HFRI Relative Value Total Index:
MTD 0.99%
QTD 2.48%
YTD 2.48%
Credit / Income
Credit / Income
Corporate credit strategies generally produced positive returns in March. Managers generally benefited from tightening credit spreads and stable interest rates. The corporate long / short sub-strategy performed well as every manager held by HFS products in this space produced a positive return. Gains were driven by long investments in the US and Europe. Conversely, short positions detracted from performance, although the magnitude of losses were relatively limited. Long positions in financials, sovereign credit and real estate companies were the largest contributors to performance. The corporate long-biased sub-strategy typically generated profits in March. Most funds produced gains as returns were driven by long investments in bonds and loans. At the portfolio level, capital appreciation was the main driver of performance, although the sub-strategy also benefited from positive carry. Long positions in the emerging market credit and travel sectors were the largest contributors to performance.
Asset-backed strategies generally produced positive returns in March. Like prior months, the sub-strategy primarily benefited from carry income. However, select funds also produced modest gains from spread tightening. In terms of gains, most asset classes were profitable during the month. The largest contributors to performance were from exposure to Reg Cap, CMBS, CLOs, and Non-Agency RMBS.
Reinsurance / ILS strategies generally produced positive returns in March. The month was essentially a no-loss month for both cat bond and collateralized reinsurance managers. As a result, the primary driver of returns was premium income. Managers also benefitted from spread tightening as demand slightly out-stripped supply during the month.
HFRI ED: Credit Arbitrage Index
MTD 1.15%
QTD 4.56%
YTD 4.56%
Trading
Trading
Discretionary trading strategies generally produced positive performance in March. Developed macro managers were mostly positive with notable contribution from long equity positions (US / Japan and energy transition) and long commodity positions (gold and copper). Some managers also did well on FX, with a longer bias in USD, while others captured the Swiss National Bank cut via short CHF positions. Rate trading produced more mixed performance as some of the long positions in Europe/UK were accretive, via forward steepening trades, while in the US, curve steepening expressions were generally a detractor. Japan rate exposure also underperformed as markets did not move given the anticipated BoJ shift, and volatility weakened. Some managers were able to produce positive results from tactical short rates volatility trades. Emerging market managers generally produced positive results. A significant driver of performance was long exposure to Egypt T-bills, with managers benefitting from both FX appreciation and strong carry. Some funds also participated in similar trades in Nigeria. Additionally, some managers benefited from exposure across Latam and Africa. In FX, CNH short positions were also accretive, and some managers also participated in developed market trades, such as shorts in EUR and CHF. In EM rates, performance was more mixed with a sell-off across most markets. In DM rates, managers mostly incurred losses, although some benefited from the UK move lower. In commodities, energy managers were profitable for the month due to a mix of shorts in the US natural gas and volatility space as well as longs in oil. Finally, short positions in European natural gas underperformed.
Systematic trading strategies generally produced positive returns in March. Trend-following strategies were profitable via themes in equities, FX, agriculture (long cocoa), while losses were generated by fixed income and metals exposures. Energy expressions achieved gains from long oil and short natural gas positions. Alternative market managers produced positive results from equities, FX, agriculture, metals while incurring losses from positions in fixed income and energy. Key drivers to performance were long positions in cocoa and gold. Systematic managers with more diversified alpha models produced relatively flat returns with gains in energy and FX, while losses occurred in rates, equities, and metals. Short exposures were reduced in fixed income by the end of the month.
HFRI Macro Total Index:
MTD 3.17%
QTD 6.22%
YTD 6.22%
Endnotes
Endnotes
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