Hedge Funds Outperform Equity Markets in October 2023

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According to Chicago-based hedge fund research and consulting firm HFR, hedge funds as measured by the HFRI 500 Fund Weighted Composite Index declined 1.5%, slightly outperforming the S&P 500 Index which dropped 2.20% during October 2023.  Weakness in long/short healthcare and technology funds were offset by strength in macro thematic, and currency focused strategies for the month. 

HFRI 500 October Performance

According to HFR, the HFRI 500 Fund Weighted Composite Index fell -1.5% in October, bringing hedge funds’ year-to-date performance to +0.51%.  Over the past twelve months, the HFRI 500 Fund Weighted Composite Index has risen +0.99%.  The HFRI Institutional Fund Weighted Composite Index, which measures the performance of the largest funds to report performance (in excess of USD $500 mln in AUM) fell -1.18% during October 2023.

Fixed income-based, interest rate-sensitive strategies were the strongest performing hedge fund category during October, as the HFRI 500 Relative Value Index slipped a meager 0.08%.  This performance was paced by a +2.21% increase in the HFRI 500 RV: Fixed-Income – Sovereign Index; and a +1.17% rise in the HFRI 500 RV: Volatility Index.  On a year-to-date basis, the HFRI 500 Relative Value Index has risen +2.57%.

Uncorrelated Macro strategies recorded a -1.18% decline during October.  The Macro sub-strategies which posted the greatest strength during the month include the HFRI 500 Macro: Systematic Discretionary Thematic Index which rose +0.22%; the HFRI 500 Macro: Curremcy Index which rose +0.20%; and the HFRI 500 Macro: Discretionary Directional Index which also rose +0.08%.  On a year-to-date basis, the HFRI 500 Macro Index has fallen -0.66%.

Event-Driven strategies, which often focus on out-of-favor, deep value equity exposures and
speculation on M&A situations, posted modest weakness during October as the HFRI 500 Event-Driven Index fell -1.44% during the month.  The Event-Driven sub-strategies which led October’s hedge fund performance include the HFRI 500 ED: Merger Arbitrage Index, which fell -0.38%; the HFRI 500 ED: Special Situations Index, which declined -1.44% for the month; and, the HFRI 500 ED: Event Driven Directional Index which fell -1.53%.  On a year-to-date basis, the HFRI 500 Event Driven Index has risen +2.49%.

Equity Hedge strategies, which invest long and short across specialized sub-strategies, was the weakest performing hedge fund category in October as the HFRI 500 Equity Hedge Index fell -2.24% during the month.  This drop was paced by the -3.98% decline in the HFRI 500 EH: Healthcare Index; the -3.03% decline in the HFRI 500 EH: Technology Index; and, the -2.38% drop in the HFRI 500 EH: Fundamental Growth Index.  On a year-to-date basis, the HFRI 500 Equity Hedge Index has slipped -0.21%.

Hedge Fund Research also reported recently that overall hedge fund capital surpassed the $4 trillion mark in 3Q 2023 — the fourth consecutive quarter this has taken place as investors allocated new capital to Event Driven and Relative Value Arbitrage strategies, while paring allocations to Equity Hedge strategies. Hedge funds extended YTD gains through the volatile third quarter, with total global hedge fund capital rising to an estimated $4.0 trillion, a quarterly increase of nearly $53 billion. Investors allocated an estimated $2.3 billion in new capital to the hedge fund industry in 3Q23, the third consecutive quarter of net asset inflows, with inflows led by Event Driven strategies.

Our Take

Despite the modest decline in hedge fund returns during October, the relative outperformance of the hedge fund industry when compared to other investment assets continues to attract investors to hedge funds for both defensive as well as opportunistic reasons.

Kenneth J. Heinz, President of HFR discussed the recent performance of the hedge fund industry saying, “Total hedge fund capital surpassed the $4 trillion milestone again to conclude 3Q, a milestone initially surpassed in 4Q 2021 before capital declined in 2022, as a volatile combination of macroeconomic and geopolitical risks drove industry performance and investor allocations through a risk off market cycle. Hedge funds have again navigated a powerful shift and negative reversal in risk tolerance and sentiment, as positive correlation between equities and bonds rose sharply throughout 3Q, presenting risks to classic, traditional long-biased strategies, as well as opportunities for funds tactically positioned for these trends.  Investor sentiment recently has been driven by macroeconomic and geopolitical risks, with focus not only on inflation and interest rates, but military conflict, including both supply chain and political impacts of these volatile, fluid situations. Once again, strategies which have demonstrated their ability to navigate this latest shift in risk sentiment and evolving, forward-looking risks are likely to attract capital from leading global financial institutions seeking to opportunistically position their portfolios while also preserving capital, with these driving industry growth into 2024.”

The out-performance seen from hedge funds given the market volatility in October could benefit the investment research industry as hedge funds have traditionally been some of the biggest users of sell-side and independent research.  We suspect that most hedge funds will remain aggressive by trying to boost their performance throughout the remainder of 2023 and well into the first half of 2024 – a trend that is likely to support increased spending on sell-side and IRP research.

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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