HFS Bulletin

US Equity Hedged strategies generated mixed returns in June. Overall performance reflected a significant degree of dispersion. Manager performance tended to be more idiosyncratic than usual with mixed performance among managers. The narrow market resulted in weak long alpha, which was offset by strong short alpha driven by weakness in certain pockets, such as select retailers. This bifurcation carried over to the sector level with technology stocks at the top of the pack, while more than half of the sectors ended up in negative territory. Utilities was the worst performing sector as many of the second derivative plays on AI tied to energy consumption retreated from frothy levels. Inline or weaker than expected labor market data and inflation prints supported the prospect for rate cuts later in the year, resulting in a general upward bias for the broader market, though it was a narrow advance and factor moves reflected that with momentum, growth, size, and quality leading the way. Under the surface, there was material dispersion among cohorts and sectors with large capitalization growth driven again by the AI theme, while small capitalization value stocks produced modestly negative performance.

European Equity Hedged strategies generally produced negative returns in June. Alpha generation for fundamental European funds was generally positive in a month where long / short managers in the industry had positive alpha relative to MSCI Europe but negative absolute returns given beta exposure. Generalist funds in the region tended to outperform the index, whereas energy funds produced negative alpha. By sector, renewables, autos, miners, and energy drove market losses, while technology, semiconductors, and healthcare outperformed. In terms of factors, quality and momentum benefited while value, realized volatility, and dividend yield lagged. Prime brokers reported that equities in the region were net sold in June, marking a change from being net bought the month prior. There was a 2.5 ratio of short selling to long selling driven primarily by macro products as long positions were unwound and funds added to short positions. By sector, financials and information technology were the most net sold, while industrials and utilities were the most net bought. Overall, across the industry, gross exposure increased by 2.3% to 189.7%, which brings it to its 90th percentile on a three-year basis, while net exposures increased by 2.5% to 62%.

Asian Equity Hedged strategies generally produced positive returns in June. Performance during the month was largely driven by China, Japan, and AI exposure. The Japanese market also demonstrated strength in JPY terms but relatively underperformed in USD terms as the Yen depreciated 2.3% in June. In China, the market was mostly weaker ahead of the 3rd plenum with mixed macro data. A-share mid and small capitalization stocks continued to be under pressure over the delisting fear as the government works to tighten up quality of the listed companies.

HFRI Equity Hedge Total Index:

Fixed income relative value strategies generally produced positive returns in June. Overall results were muted given lower volatility profile. Managers with higher concentration in US cash / futures basis strategies were slightly negative as there was some market deleveraging during the month. Managers who outperformed in June were able to capture the volatility in European country spreads and swap spreads following the political uncertainty in France. Swap spread trading in general was mixed depending on positioning and trade timing. STIR and front-end trading strategies, as well as cross currency basis trading, was generally positive for most managers, as was inflation trading. US cash / futures basis detracted, and other cash / futures basis trading was generally flat, with some small gains in Japan and Canada. In directional rates, short exposure in Japan detracted for some managers.

Capital structure / volatility arbitrage strategies generally produced positive returns in June. Regionally, the US offered the newest paper thus far in 2024 (USD 39bn), followed by Asia (USD 12bn), Japan (USD 5bn), and Europe (less than USD 2bn). Notably, the deals that were priced in 1H 2024 were more aggressive versus the prior year, offering slightly lower coupons and higher conversion premiums, albeit still below pandemic-era levels. Another noteworthy development in 1H 2024 were significant issuance volumes offered by Chinese technology companies, such as Alibaba, JD.com, and others. During the month, managers were opportunistically using attractive valuations to lighten up into the strength and prepared to deploy as new opportunities emerge. In addition, interest rate and equity hedges detracted. In June, non-investment grade convertible bond spreads decreased by 20bps to 518bps, and the spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index decreased to 239bps from 259bps.

Merger arbitrage and event-driven strategies generally produced positive returns in June. For the 1H 2024 overall, global M&A volumes exceeded USD 1.6tn, up 10% YoY, driven primarily by North America. Although cross-border M&A activity volumes did not see a significant YoY change, there was a pick-up in deals between North American and EMEA regions as well as intra-EMEA. A notable contributor for some managers – and a widely held transaction – was DS Smith that the managers benefitted from after Suzano walked away from the rumored bid on International Paper. Equity capital markets managers also delivered positive returns. Q2 2024 brought a 9% increase QoQ in global ECM activity levels, for a total of USD 180bn. YoY, activity was 13% higher, with June volumes specifically led by the pricing of the USD 11bn follow-on of Aramco, the USD 9bn rights issue from National Grid, and several follow-ons of USD 400m+. Blocks and follow-ons continued to drive a significant part of the managers’ performance.

Agency MBS strategies produced relatively flat returns in June. Managers generated positive returns from carry as the fundamental profile of the mortgage derivative segment of the market was favorable due to sustained slow prepayment speeds. However, there was a greater divergence in manager returns due to differences in hedging and basis positioning. Managers with net long exposure to the mortgage basis underperformed.

Quantitative equity strategies generally produced positive returns in June. The QE market neutral cohort reported that systematic long / short strategies produced gains, driven mostly by positive alpha. We also observed some outperformance of long-term models over short-term models, in line with most year-to-date performance. This likely was reflected by the self-reinforcing loop coming from optimizers that tend to allocate to the best performing models over recent periods. Crowdedness, momentum, low beta, asset selection, and sector tilts were generally additive to performance, although partially offset by losses from size and quality. Volatility continued to be muted and Short Interest sold off, offering further tailwinds to quant managers. Intra-sector versus between sectors’ daily dispersion declined month-over-month suggesting lower importance of micro drivers. However, we continued to see a healthy level of our proxy ratio (92nd percentile) which suggested continued support under the surface for quantitative stock pickers.

HFRI Relative Value Total Index:

Corporate credit strategies generally produced positive returns in June. The corporate long / short sub-strategy generated a positive return with most funds producing positive results, although dispersion increased during the month. In terms of profitable trades, short positions were a key driver of performance as tactical short positions in emerging markets and European sovereigns performed well. Long positions produced mixed results, although some managers were negatively impacted by long exposure and capital structure arbitrage trades in non-investment grade issuers. The corporate long-biased sub-strategy generally produced a small positive return. Carry was the main driver of performance. However, all funds generated mark-to-market losses as a result of market-level spread widening that occurred during the month.

Asset-backed strategies (ABS) generally produced positive returns in June. At the portfolio level, interest income was additive to performance, although a portion of these gains were offset by mark-to-market losses. There was a higher degree of dispersion by asset class, which ultimately impacted divergence in returns across each manager. Funds with larger allocations to RMBS and multi-family CMBS tended to outperform. Conversely, investments in CLOs generated losses.

Reinsurance / ILS strategies generally produced positive returns in June. The month was essentially a no-loss month for both catastrophe bond and collateralized reinsurance managers. As a result, the primary driver of returns was premium income as spread movements were negligible.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generated mixed returns in June. Among developed market managers, results were uneven during the month. Within interest rates, some positive contributions were generated from receivers and steepeners in EUR, UK, and US, although in general, gains were offset by short exposure in Japan. Those with a more hawkish bias generally underperformed. Short volatility trades were also challenged. In FX, a long USD bias was additive, while carry trades were challenged. Equities continued to be a strong positive driver for those with larger exposures, particularly in the US technology sector. In commodities, some losses for certain managers occurred from long exposure to copper through the month, while those with cross-commodity semi-systematic strategies mostly generated gains. Within emerging market managers, EM rates receivers contributed to performance. Idiosyncratic opportunities in Turkey and Egypt were quieter as positive carry was offset by underperformance in FX, particularly in the case of Egypt. In commodities, energy managers performance was also mixed. Some managers were flat for the month after enduring material P/L volatility through June, while others experienced losses driven by oil and coal, with smaller losses incurred in power, natural gas and metals.

Systematic trading strategies generally produced negative returns in June. Trend-following strategies were challenged from fixed income, credit and commodities with equities and alpha capture models providing offsetting gains. Alternative market managers incurred losses across most of the sectors during the month. Agriculture was the top performing sector, while metals was the worst performing sector. Systematic managers with more diversified alpha models added modest gains primarily due to currencies and agriculture, which were offset by losses in rates and equity indices.

HFRI Macro Total Index: