HFS Bulletin

US Equity Hedged strategies generally produced positive returns in August. While most managers exhibited positive performance, there were some outliers that incurred losses. Underperformance tended to include those with exposure to smaller capitalization stocks and / or biotechnology focused, as well as exposure to stocks that “over-earned” in July. Growth fears translated into a material amount of sector dispersion as defensive sectors, such as consumer staples, healthcare, and utilities, led the way higher, while consumer discretionary and energy stocks generally traded lower. On a subsector basis, semiconductor stocks were notably weaker. The market gyrations and dispersion by sector and individual names resulted in a solid alpha month, especially on the short side. While broad markets were modestly higher during August, the path was uneven with the early month sell-off and volatility spike being essentially erased by month-end. There was considerable variation by market capitalization again as small capitalization stocks resumed their status as laggards due to growth concerns following the US employment data release.

European Equity Hedged strategies generally produced positive returns in August. Overall alpha generation was mixed as market beta and price momentum generally drove fund performance. Funds with exposure to the industrials sector lagged across the industry, while funds with higher levels of exposure to industrials or energy names produced muted performances relative to broader indices. Generalists tended to post slightly better absolute performance. By sector, telecommunication, healthcare as well as travel and leisure positions outperformed, while positions in EU energy, miners and semiconductors tended to lag. Factor wise, quality and growth names outperformed, with a smaller benefit to momentum names, while value equities lagged. Prime brokers reported net selling of European equities following a record de-grossing event over the past decade. In general, there was an equal amount of long selling and short selling. Healthcare was the most net sold sector in the region, followed by industrials and financials. The only net bought sector was communication services.

Asian Equity Hedged strategies generated mixed returns in August. The Japanese market demonstrated significant volatility at the start of the month with the Nikkei 225 Index down 20% over 3 days, including the ‘Black Monday’ where the market was down -12.4%. The market subsequently stabilized after the initial volatility but ended the period negative. Hedge funds with large Japan exposures were challenged, although most funds were able to recover losses from the first week of the month. In China, the market traded reasonably well throughout the month until one large US listed e-commerce company surprised investors and experienced a large selloff which dragged down the technology sector and the ADRs. As a result, the Hang Seng Index significantly outperformed the MSCI China index and ADRs. China announced more market supporting measures to support both the property market and consumption, but market sentiment toward China remains defensive.

HFRI Equity Hedge Total Index:

Fixed income relative value strategies generally produced positive returns in August. Manager returns continued to pick up from a more muted pace earlier in the year in line with the uptick in market volatility. The main driver of performance has been some improvement in US basis where managers have been able to add slightly on recent dislocations. In addition, gains were attributable to a combination of CTA and real money buying futures as markets repositioned for long duration trades, driving some widening in the basis. Basis and bond RV in other geographies were mixed, with Europe continuing to be muted. Global swap spread trading was also a positive performance driver for several managers via mainly short asset swap positions in the US and Europe, while cross-currency basis trading was mixed. Directional macro short positions in Japan detracted, while long-biased front-end positions elsewhere were additive for some managers.

Capital structure / volatility arbitrage strategies generated mixed returns in August. Results varied from strongly positive for convertible arbitrage managers, to flat to slightly negative for capital structure / credit arbitrage strategies. Broad convertible arbitrage funds captured gains amid the sharp swings in asset prices while profiting from several earnings-related opportunities. The refinancing trade which had been showing signs of exhaustion in June and July, staged a bit of a comeback in August, supporting managers’ performance. Global convertible bond issuance was muted in August and totaled USD 3.6bn, making it the lowest-volume month of 2024, due in part to the heightened volatility in risk assets, the earnings season lull, and summer holidays. The US led with USD 2.4bn of issuance volume. Asia exclusive Japan priced USD 595m across three deals, Europe offered USD 555m in one deal, while Japan saw no new deals in August. Year-to-date, the global market has priced USD 72.8bn, a year-over-year increase of +40%. Finally, non-investment grade convertible bond spreads increased by 8bps in August to 520bps, and the spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index increased to +243bps from +232bps last month.

Merger arbitrage and event-driven strategies generally produced positive returns in August. Merger spreads were roughly 50bps tighter in August after a challenging July. Global M&A volumes were 16% higher year-over-year. Geographically, North America remained in the lead, representing around 60% of the global deal volume. In August, the largest deal of 2024 came to the market (AMD / ZT Systems), although the pace of + USD 5bn deal announcements was subdued. Equity capital markets (ECM) strategies produced positive returns. ECM activity was typical for August, with lower volumes and approximately USD 39bn of transactions globally, which was +13% year-over-year. USD 6.2bn of those came via IPOs. Managers with exposures to Japan conglomerate blocks with any sort of holding period had to contend with risk-off and month-over-month losses. Within the US, follow-on activity remained the main ECM transaction driver.

Agency MBS strategies generated mixed returns in August. Elevated levels of dispersion occurred during the month as one core allocation was positive, while the other was slightly negative. Carry was the key driver of performance during the month. In addition, managers with long duration biases tended to outperform. Mortgage derivative valuations were flat to marginally wider for the month.

Quantitative equity strategies generally produced positive returns in August. Gains occurred in the market neutral cohort, recovering from losses earlier in the month. Systematic long / short managers were also positive. Outperformance occurred for long and medium-term models relative to short- term approaches, as momentum factors drove performance after the first week of the month. The rest of August experienced a continuation of YTD trends, with defensive (low beta, high quality) contributing to performance and short interest weakening. Volatility, asset selection, medium-term momentum, long crowdedness, and profitability were among the largest alpha contributors in August, which were partially offset by losses from short crowdedness, earnings yield, and short interest.

HFRI Relative Value Total Index:

Corporate credit strategies generally produced positive returns in August. The corporate long / short sub-strategies generated positive results with all funds achieving gains. Investments in investment grade and high yield contributed positively to performance, although the platform’s European allocation generated the highest return. In aggregate, the long portfolios drove performance, while the short portfolios generally detracted from returns. However, index hedges also generated gains in the first half of August. Corporate long-biased strategies also produced positive returns. All funds were positive with long investments in the high yield bond and leveraged loan sectors being the primary driver of performance. Gains were attributable to a combination of positive carry and spread tightening.

Asset-backed strategies (ABS) generally produced positive returns in August. Similar to July, every fund produced a positive result in August. Profits were driven by long investments, with the majority of gains being attributable to carry. Long investments in Non-Agency RMBS, SRT, and select CLO investments were the top contributors during the month. In addition, investments in multifamily CMBS and Agency SRT also performed well.

Reinsurance / ILS strategies generally produced positive returns in August. August was essentially a no-loss month for both catastrophe bonds and collateralized reinsurance managers, although our collateralized reinsurance manager did take a slight markdown on some contracts related to severe convective storms across the US that as of the end of August no losses were realized. As a result, the primary driver of returns was premium income although tightening spreads also contributed materially to catastrophe bond returns.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generated mixed returns in August. Developed market managers produced gains earlier in the month due to recession / risk-off trades, but some of the managers gave back those gains by month-end. Generally, funds maintained a receiver and steepening bias through the month, though Japan short exposure was the main detractor across the interest rate complex. Those managers with a more hawkish view underperformed during the period. Within FX, the long USD trade detracted, with notable losses from CNH short exposure. Conversely, managers with long JPY exposure outperformed. Within equities, those with a long-bias underperformed, with most losses incurred from long positions in Japan. Within commodities and credit, performance was generally muted in August. In general, EM experienced relatively less volatility. Developed market receiver / steepening trades were additive, while losses occurred for some managers with short exposure. EM receivers were mostly additive, while FX themes underperformed due to Asia carry trades, including CNH as well as EUR short positions. Idiosyncratic stories were mixed, with Egyptian pounds exposure offsetting FX losses with carry, while the Turkish lira tended to be a drag on performance given the larger move in FX. Protection trades in equities and credit were additive early in the period, but most failed to hold up to gains as markets reversed throughout the month. For commodity managers, within green materials, solar and fiber themes continued to be accretive. Energy trading was more mixed, with managers generating gains via natural gas themes, while some incurred losses across oil, coal, electricity and emissions markets.

Systematic trading strategies generally produced negative returns in August. Trend-following strategies incurred broad based losses across asset classes but were mostly concentrated in equities, currencies and fixed income. Agricultural commodities and equity indices within systematic macro as well as pair trades within quantitative credit provided modest offsetting gains. Alternative market managers’ performance was mixed with gains generated from equity factor and yield curve strategies, followed by alternative commodities, while losses were incurred from currencies, equities, energies, fixed income and credit / volatility strategies. Systematic managers with more diversified alpha models incurred losses, primarily from currencies, energies and agriculture, which was offset by modest gains from equity indices, rates and metals.

HFRI Macro Total Index: