Hedge Funds In A “Period Of Strong Performance”

According to one firm that tracks hedge-fund returns, two-thirds of funds were in positive territory for May, a sharp reversal from April, when the average fund posted a slightly negative return. Meanwhile, another firm that also tracks returns reported that the equity markets also recovered in May, contributing to a “period of strong performance” for hedge funds.

However, a meaningful difference between the two firms’ year-to-date average hedge-fund returns is noteworthy.

Hedge funds return to “winning ways” amid “strong performance”

According to Citco’s May update, the overall weighted-average return for the funds it administers was 1.7% in May, a significant bounce from April’s small dip. Following May’s return, Citco funds administered by Citco have posted a year-to-date weighted-average return of 8.26%.

However, the median return among Citco-administered hedge funds was only 0.6% for May, significantly lower than the weighted average.

Meanwhile, the PivotalPath Composite Index gained 1.1% in May, bringing its year-to-date return to 6.1%, a significant dispersion with Citco’s year-to-date result. However, PivotalPath’s index continues to generate positive alpha of 6.3% relative to the S&P over the last 12 months — despite the equity markets’ decline in April and subsequent recovery in May.

The firm stated that hedge funds in general are “experiencing a period of strong performance.” The PivotalPath Composite Index now sits in the 90th percentile of all 12-month rolling periods going back 10 years.

Best- and worst-performing hedge fund strategies

Fixed income arbitrage and global macro funds led the May returns with weighted-average returns of 2.7% and 2.6%, respectively. Both strategies posted median returns of 0.9% for May.

Multi-strategy funds generated a weighted-average return of 1.4% and a median return of 0.1%. Commodities funds just barely remained in the green for May with a weighted-average return of 0.1%, marking the sixth straight months of positive returns for the strategy. However, the strategy bucked the broader trend among hedge funds with a larger median return of 0.8%.

The only strategy in the red for May was event-driven with a weighted-average decline of 1.2%, the second consecutive month of negative returns. On a median basis, event-driven funds were up 0.7%.

Performance by size

Citco-administered funds reversed the small declines in assets under administration last month as all categories gained in May. The largest funds with over $3 billion in assets generated the best returns, gaining 2.1% on a weighted-average basis. The second-best size grouping covered funds with $1 billion to $3 billion off assets, which gained 1.3%.

The rate of return spread, or the difference between the 90th and 10th percentile of Citco-administered funds dropped to 6.1% in May from 7.9% in April. The firm noted a jump in the difference between the best- and worst-performing funds in April.

Meanwhile, PivotalPath recorded significant outperformance by the smallest hedge funds it tracks, which have less than $100 million in assets under management. They led the way in May with an average 2.11% return, extending their year-to-date gain to 8.52%.

In second place year to date is funds with $100 million to $250 million, up 7.45% year to date and 1.72% on average in May. The returns for the other size groupings descended from there, with the largest cohort with over $5 billion in assets being the one exception on a year-to-date basis. The largest funds have averaged a 6.74% return year to date, although they were the second-lowest gainer in May, rising by an average of 0.43%.

While two-thirds of Citco-administered funds are positive year to date, about 86% of the funds tracked by PivotalPath are in the green with an average return of 9% among those with positive returns. The average decline among funds in the red is 4.4%.

The year of the stock picker?

According to PivotalPath, the robust equity markets drove hedge-fund returns in May, as equity diversified, equity quant, and equity sector funds rose 2.2%, 1.5%, and 1.4%, respectively. As a result, PivotalPath questioned whether 2024 will end up being “the year of the stock picker.”

Equity sector funds are now up 6.8% year to date, with financials rising 2.9%, energy and utilities up 4.4%, and the technology, media, and telecom sector gaining 2.4%. On the other hand, PivotalPath’s Healthcare Sector fell 0.9% in May, although it remains up 5.4% year to date.

Driven by long/ short strategies in Asia and the U.S., the firm’s Equity Diversified index has gained 7.8% year to date.

Meanwhile, managed futures reversed their performance on the month but continued to lead strategies year to date. Managed futures declined 1.4% in May but remains up 8.8% year to date. On a one- and three-year basis, the strategy is up more than 7%.

PivotalPath’s Multi-Strat Index rose 0.7% in May, in line with April and bringing its year-to-date return to 5%. The event-driven index rose 1.7% for the month and is up 4% year to date. On a rolling 12-month basis, event-driven funds are up 11.8%.

Inflows continued into Citco-administered funds

Net inflows into Citco-administered funds continued in May, with investors showing significant preference for hybrid funds, which attracted $1 billion in net inflows.

In May, funds recorded net inflows of $3.2 billion in May, including $11.1 billion in subscriptions and $7.9 billion in redemptions. After May’s and April’s positive flows, Citco-administered funds have now notched year-to-date net inflows of $7.9 billion.

May was the fourth straight month of net inflows for hybrid funds, continuing the momentum that began in 2023. Year to date, hybrid funds have captured $5.9 billion in net inflows. Funds of funds are in a distant second place with $700 million in net inflows in May, followed closely by equities funds at $600 million.

Flows for emerging markets and global macro funds were flat in May with equal inflows and outflows. Meanwhile, event-driven funds notched net outflows, albeit very minimal at $100 million.

Market backdrop for hedge funds in May

In May, inflation held steady while employment trends remained solid and wage pressure declined, with all of these trends driving continued focus on interest rates. Economic data continues to drive the markets, fueling them to resume their pre-April trajectory.

All major stock indices reversed their April selloffs in May, with the S&P 500 up 4.96%, the Nasdaq climbing 6.68%, and the Russell 2000 rising 4.87%.

Utilities were the top gainers at 9.96%, followed by technology’s 7.08% rise and biotech’s 5.48% increase. However, biotech is off 1.45% year to date, while utilities and technology are up 14.83% and 9.19%, respectively. Year to date, utilities is the best-performing sector, followed by communications’ 14.59% gain.

The value and growth factors switched between April and May yet again, with value up 0.3% in May but off 2.32% year to date. Growth was down 0.3% in May and is up 2.32% year to date. Momentum continued to rise in May, now up 20.2% year to date to lead all factors.