According to Chicago-based hedge fund data, research and consulting firm HFRI, hedge funds posted a modest -0.6% loss in July as investors focused on the increased uncertainty surrounding the spread of COVID-19 variants. This drop marked the first monthly decline for the HRFI Fund Weighted Composite Index since September 2020.
July Performance for Hedge Funds
According to data released last week, the HFRI Fund Weighted Composite Index® (FWC) fell -0.6% in July, while the investable HFRI 500 Fund Weighted Composite Index slipped -0.5%. While this monthly showing marks the first decline in hedge fund performance since September 2020, ending the streak of monthly gains at nine.
Uncorrelated Macro strategies, led July fund performance as the HFRI Macro (Total) Index decline a mere -0.1%, while the investable HFRI 500 Macro (Total) Index fell -0.2%. One Macro sub-strategy which performed well during July was the HFRI Macro: Systemic Diversified Index which rose +0.6% during July.
Event-Driven strategies, which often focus on out of favor, deep value equity strategies and situations, posted losses in July, with the investable HFRI 500 Event-Driven Index falling -0.85%, while the HFRI Event-Driven (Total) Index dropped -0.8% during the month. The Event Driven strategy that posted the strongest gains during the month include the HFRI ED: Credit Arbitrage Index which rose +0.8% in July.
Equity Hedge strategies, which invest long and short across specialized sub-strategies, posted its first monthly decline since September 2020. The HFRI Equity Hedge (Total) Index declined -0.8% in July. This reflected a healthy +1.7% gain from the HFRI EH: Quantitative Directional Index, which was offset by 1 -2.9% loss in the HFRI EH: Sector-Healthcare Index, and a 2.4% decline in the HFRI EH: Sector-Energy/Basic Materials Index.
Despite the dip in hedge fund performance in July, the HFRI FWC Index has risen +9.5% through the first seven months of 2021, including the strongest performance in the first half of a calendar year since 1999. Driven by investor inflows and strong performance, total hedge funds industry capital surged to a record $3.96 trillion through mid-year 2021.
While investor nervousness over the resurgence of various COVID-19 variants evident in July, the overall macro environment should prove to be constructive for some hedge funds in the second half of 2021. Strong economic performance and renewed inflation concerns should prompt sharp market volatility in the coming months, a development that could be extremely beneficial for some hedge fund strategies.
The constructive performance seen from hedge funds so far in 2021 would lead us to take a more constructive view on the institutional research marketplace as hedge funds are traditionally the most aggressive users of sell-side and independent research and the most lucrative clients for these providers. Consequently, we suspect that hedge funds are likely to reward their best sell-side and independent research firms through higher research payments.
Unfortunately, most long only asset managers continue to refuse to increase payments to their sell-side and independent research providers due to the limited research budgets established in the wake of MiFID II. These conflicting trends suggest that most external research providers are likely to continue focusing their efforts on serving their hedge fund customers as they remain their most profitable clients.