We have seen that since the US election result, stocks have rallied as uncertainties – at least about the outcome – vanished. Hedge funds slipped in October, with performance dispersion widening in the month.

Investors’ caution in the weeks leading up to the 5 November US elections dented hedge funds’ returns in October, according to returns data issued late last week. 

The HFRI Fund Weighted Composite Index (FWC)® fell 0.7 per cent in October from September, while the HFRI Asset Weighted Composite Index fell 0.6 per cent for the month, according to data released by Hedge Fund Research, the Chicago-headquartered research firm.

The FWC Index is up 7.43 per cent since January; the Asset Weighted Index is up 5.81 per cent. 

The hedge fund sector in general – which has waxed and waned in its fortunes in recent years and seen a squeeze on its fees – has lagged broad stock market indices so far this year. Back in 2017, famed US investment figure Warren Buffett said the hedge fund industry does not justify its fees. Nevertheless, hedge funds’ advocates say the sector justifies its place in portfolios because of an ability to short-sell and generate gains in a down-market, as well as capture opportunities outside more normal channels. 

For example, take this comment (1 August 2023) from Renier de Bruyn, at Sanlam Private Wealth: "In the ever-changing and unpredictable world of investments, having a diverse set of tools is essential. Hedge funds are one such tool – they can significantly enhance the potential return of a diversified investment portfolio."

The S&P 500 Index of major US stocks is up 26 per cent, gaining a particular boost in the first week of November with the Trump victory ending uncertainties about the result. The MSCI World Index of developed countries’ shares (in dollars) shows total returns (capital growth plus reinvested dividends) of 21 per cent, as of 7 November. 

The specifics
Performance gains of 0.6 per cent for the month in the HFRI Relative Value Index were more than offset by declines in the HFRI Macro (Total) Index, which fell 2.0 per cent in October versus September.

Hedge fund performance dispersion narrowed in October, as the top decile of the HFRI FWC constituents advanced by an average of 3.8 per cent, while the bottom decile fell by an average of 7.3 per cent, representing a top/bottom dispersion of 11.1 per cent for the month. 

Fixed income-based, interest rate-sensitive strategies led strategy performance in October, as US interest rates increased and equities declined heading into the early November US Presidential election, with the HFRI Relative Value (Total) Index gaining an estimated 0.6 per cent for the month.

Event-Driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, reversed recent monthly gains with a decline in October, as the HFRI Event-Driven (Total) Index fell 0.35 per cent.

Equity Hedge funds, which invest long and short across specialised sub-strategies, also fell, with the HFRI Equity Hedge (Total) Index falling an estimated 0.7 per cent for the month to bring the year-to-date return to 9.6 per cent, which has led all main strategy indices since the start of 2024. 

Macro strategies led declines in October as US interest rates increased and investors positioned for the US Presidential election, with the HFRI Macro (Total) Index falling 2.0 per cent.

“With clarity on the US election results, investors and managers are actively adjusting exposures to their expectations for priority policy shifts on international trade, manufacturing, immigration, energy, security with these changes resulting in significant impacts for monetary and fiscal policy, supply chains, M&A and geopolitical risk,” Kenneth J Heinz, president of HFR, said.