HFS Bulletin

US Equity Hedged strategies generally produced positive returns in September. While generalist managers tended to outperform sector-focused managers, individual stock selection was the primary driver of manager returns. Alpha generation was mixed, depending on the metric used, but was generally stronger on the long side and more challenged on the short side. After a difficult start to the month on renewed growth concerns, markets rallied the remainder of the month, prompted by the Fed’s 50 basis point rate cut. The risk-on sentiment manifested itself with the typical factor playbook of the largest tailwind stemming from realized volatility, while quality was the largest headwind. Additionally, momentum and size were also positive contributors as sentiment towards the typical AI-related proxies was well supported. In general, a shift from defensives into cyclicals was witnessed as confidence grew regarding the potential of a soft landing. Consumer discretionary was the top performing sector as the rate move provided a boost, while utilities were a close second. Gaming stocks performed well as the positive sentiment around China generated interest in companies with Macau exposure.

European Equity Hedged strategies generated mixed returns in September. Alpha generation was generally positive but mixed by sector in a month with performance across the European fundamental long / short strategies being primarily driven by alpha gains related to utilities, momentum, and Germany exposure, and offset by beta losses. Generalist funds on the platform tended to outperform, while energy funds mostly lagged. By sector, miners, utilities, renewables, and real estate outperformed, while energy, oil, autos, and healthcare underperformed. Factor wise, realized volatility and dividend yield names were top performers, while quality, growth, and momentum lagged. Prime brokers reported seeing net buying of European equities, with a 3 to 1 ratio of long buying to short covering. Notably, some hedge funds purchased macro products, while single stocks were net sold for the second month in a row. UK, Switzerland, and Belgium were the most net bought markets on a notional basis, while France, the Netherlands, and Ireland were the most net sold. By industry, financials and consumer discretionary led net buying, while industrials, energy, and technology names were net sold. Across the industry, gross exposures for European fundamental long / short funds decreased -3.3% to 186%, its 65^th percentile on a 3-year basis, while net exposures decreased -2.8% to 58.7%.

Asian Equity Hedged strategies generally produced positive returns in September. Performance was driven primarily by the rally in China, given the proposed stimulus from the government. The Japanese market remained volatile, following the August turmoil as the market was weaker amid the potential slowdown in the US economy. The election at the end of the month also added to the volatility in the yen as well as the equity market due to the policy uncertainty of the newly elected Prime Minister. In China, the overall market rallied over 20% after the Chinese government’s surprise policy announcement on monetary and fiscal policies to support the property and equity markets.

HFRI Equity Hedge Total Index:

Fixed income relative value strategies generally produced positive returns in September. Larger gains occurred in US bond RV and US cash / futures basis strategies. European micro-RV strategies remained muted, but short swap spread positions in Europe added to performance. Macro / STIR (Short-Term Interest Rate) trading strategies with a received bias generally produced gains, while paid positions in Japan detracted from performance. Tail hedges, such as European country spreads and front-end basis wideners, also incurred losses.

Capital structure / volatility arbitrage strategies generally produced positive returns in September. Outperforming managers typically benefited from exposure to China ADRs which were supported by the stimulus announcements. Convertible arbitrage funds generally experienced broad-based gains amid high realized volatility, improved valuations and tighter credit spreads, combined with rallying rate and equities markets. Global convertible bond issuance in September was higher month-over-month, albeit slightly lower than the historic average as USD 9.4 billion of new paper came to market. The US led with USD 6.9 billion of issuance volume. Asia priced USD 1.7 billion, while Europe offered USD 834 million of new paper. There were no new deals in Japan. Year-to-date, the global market priced USD 82 billion, a year-over-year increase of +35%. Lastly, non-investment grade convertible bond spreads tightened by -83bps in September to 437bps, and the spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index decreased to +152bps from +243bps last month.

Merger arbitrage and event-driven strategies generated mixed returns in September. The average merger arbitrage spread tightened by approximately 30bps, while the market capital weighted spreads widened modestly due to the underperformance in some larger situations, primarily US Steel and Albertsons, which challenged performance for some merger arbitrage managers. Two transactions larger than USD 1 billion in size were announced, which in aggregate totaled approximately USD 28 billion in transaction value. This included Verizon’s USD 20 billion acquisition of Frontier Communications. Event-driven funds generally benefited from strong equity markets and developments in idiosyncratic situations. For equity capital markets managers, most of the returns were generated in block and follow-on trades, especially in the US deals. IPO activity was somewhat muted, likely due to the upcoming US presidential election.

Agency MBS strategies generated mixed returns in September. Returns were largely driven by carry income. In addition, managers with long duration biases generally outperformed following the rate rally. Valuations were essentially flat during the month meaning mortgage derivative spreads were largely flat for the month.

Quantitative equity strategies generally produced negative returns in September. Across sub-strategies, systematic long / short strategy performance was driven by positive alpha despite observing a negative long / short spread within the cohort. There was some outperformance from long-term and medium-term models versus short-term models. In a continuation of YTD trends, long-term momentum, reversal and quality signals contributed positively to performance. As macro dominated the market in September, most quantitative strategies posted negative returns during the first week of September amid weak labor data but rebounded intra-month, followed by a challenging period during the last week due to reversals. Factor driven managers tended to outperform statistical arbitrage and multi-strategy approaches. China, short interest, and profitability were among the largest alpha contributors in September, which were partially offset by losses from volatility, medium-term momentum, earnings yield, low beta and short crowdedness.

HFRI Relative Value Total Index:

Corporate credit strategies generally produced positive returns in September. The corporate long / short sub-strategy performed well. Long investments produced gains, while short positions detracted from performance. Those funds positioned with a long-biased approach typically outperformed relative to those managers with a net short-biased portfolio. However, corporate credit dispersion rose in September, which provided the short-biased managers with the opportunity to generate positive results despite the market rally. Long-biased approaches were the top returning segment of the portfolio. The strategy benefited from positive total returns in the high yield market, with CCC-rated debt outperforming and benefiting funds focused on stressed and distressed credits. At the portfolio level, mark-to-market gains accounted for the largest portion of gains, while carry income was also positive.

Asset-backed strategies (ABS) generally produced positive returns in September. Gains were largely driven by carry during the month. However, several segments of the portfolio outperformed and produced outsized gains due to idiosyncratic positive catalysts. Notably, investments in CLO equity and legacy RMBS outperformed. The platform also benefited from exposure to SRT (Significant Risk Transfer), Agency CRT (Credit Risk Transfer) and short duration private credit.

Reinsurance / ILS strategies generally produced positive returns in September. September was the statistical peak month of the hurricane season. Hurricane Helene was the primary event during the period. As such, catastrophe bond spreads tightened during the month in accordance with typical seasonality. This allowed managers in the space to benefit both from carry and price appreciation. The collateralized reinsurance market was expected to experience larger fluctuations in results based on specific contracts, although the managers only experienced a loss on a single contract, the amount of which was only a fraction of the increased seasonal carry experienced in September.

HFRI ED: Credit Arbitrage Index

Discretionary trading strategies generally produced positive returns in September. Developed market macro funds generated gains largely driven by receiver trades and curve steepening exposures. Performance in equities was more mixed, with short exposure in the US and long exposure in Japan being challenged. FX trading was also mixed as long-biased exposure in USD and short positions in CNH underperformed, while long exposure in JPY partially offset those losses. In commodities, performance was mixed as long positions in metals were additive, but those with long oil exposure underperformed. Macro RV managers generated positive performance on RV trades in US and in some cases UK rates. Emerging market macro funds also performed well with positive contribution from receivers in EM and idiosyncratic themes, such as Egypt and Türkiye. Their exposure to more developed market themes was mixed. Funds with receivers/steepening exposures produced gains, but for some funds, the gains were offset by “paid” positions in the US. For dedicated commodity managers, those with allocations to green materials, solar, fiber and magnets themes continued to produce gains. In the more traditional energy complex, performance was muted.

Systematic trading strategies generated mixed returns in September. Trend-following strategies typically produced gains, mostly from bonds and currencies, followed by equities, metals and credit. In general, the gains were partially offset by losses in energies and industrials. Alternative market manager performance was more mixed with gains coming from fixed income, currencies and credit/volatility strategies, while losses were incurred from equities, energies, metals and agricultural exposures. Systematic managers with more diversified alpha models incurred losses. These losses were broad based across asset classes, although concentrated in energies, currencies, agriculture, equities and interest rates. Conversely, positions in metals were generally additive to performance.

HFRI Macro Total Index: