Hedge funds post best gains in 15 months but are still down in 2022

July's 1.3% increase narrows this year's losses to 2.7% amid a challenging global economic environment

Assets under management in the hedge fund sector hit $4.53 trillion at the end of 2021. Reuters
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Global hedge funds recorded their best performance in 15 months in July despite a challenging global economic environment, but remained down in 2022, a report by Hedge Fund Research (HFR) has shown.

The Chicago-based industry tracker's fund weighted composite index recorded a 1.3 per cent gain last month. This was despite rising inflation, the US economy entering a recession and a strong reversal of US stock markets from their worst first half in more than 50 years, HFR said in its monthly update.

That narrowed this year's losses to 2.7 per cent, with gains driven by a recovery in equity hedge and event-driven strategies, it said.

Hedge funds had recorded a negative performance in June, HFR reported last month.

“Led by high beta strategies, hedge funds posted the strongest gains in 15 months, as powerful risk-on sentiment drove a sharp reversal in equity markets,” HFR president Kenneth Heinz wrote in the report.

“Despite the July equity market recovery, macroeconomic and geopolitical risks remain elevated, with managers effectively navigating rapidly evolving, dynamic and volatile market cycles across equity, fixed income, currency and commodity exposures.”

Hedge funds pool investors' money and invest it. Assets under management in the sector hit $4.53 trillion at the end of 2021, the first time they topped the $4tn mark.

This was a turnaround from when they fell below the $3tn level in the first quarter of last year, HFR reported earlier.

In July, the US economy shrunk for a second quarter in a row, triggering one definition of a “technical recession”. This followed the Federal Reserve's aggressive interest rate increases, which hit business and housing demand.

The Fed raised its interest rates by another three quarters of a point on July 27 as part of efforts to cool inflation, which jumped to 9.1 per cent, its highest level in more than 40 years.

“Managers are effectively positioned for both defensive capital preservation and portfolio protection, as well as opportunistic and favourable shifts in the current market paradigm,” Mr Heinz said.

“Institutions are likely to continue to allocate capital to managers [that] have demonstrated their strategy’s robustness and effectiveness through the recent spike in turmoil and volatility.”

Equity hedge funds, which invest in long and short positions using specialised sub-strategies, led July's gains, climbing 3.25 per cent, HFR said.

Event-driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on mergers and acquisitions situations, gained 3 per cent.

Fixed income-based strategies rose by 1.5 per cent, as the Fed raised interest rates and inflation remained high.

Meanwhile, macro strategies scaled back on their strong first-half gains with a 1.5 per cent drop in July, lowering their positive performance so far this year to about 12 per cent.

Updated: August 08, 2022, 8:48 AM