Stock markets recovered in July, and funds employing an equities strategy typically fared better, driving the overall industry up. Macro funds, which profit from market swings caused by political and economic events, gave up some of their gains for 2022.

Hedge funds gained in July as US equity markets posted a strong reversal after the worst first half of a calendar year in more than 50 years, figures show.

Funds that are linked to equity markets fared much better in July than for much of the year; macro strategies that have profited for much of this year have pared some of their gains, according to Chicago-based Hedge Fund Research. 

The investable HFRI 500 Fund Weighted Composite Index advanced by 1.3 per cent for the month, narrowing the 2022 decline to -2.7 per cent, with gains driven by a recovery in equity hedge and event-driven strategies.

The dispersion of hedge fund performance narrowed in July, as the top decile of the HFRI constituents rose by an average of 9.9 per cent, while the bottom decile fell by an average of -5.8 per cent, representing a top/bottom dispersion of only 15.7 per cent. By comparison, the top/bottom dispersion was 26.8 per cent in June and 22.1 per cent in May. Through the first seven months of the year, the top decile of the HFRI has surged an average of 28.9 per cent, while the bottom decile has declined by an average of -26.6 per cent, representing a top/bottom dispersion of 55.5 per cent. Nearly 60 per cent of hedge funds posted a positive performance in July.

Segments
Equity hedge funds, which invest long and short across specialised sub-strategies, posted strong performance in July, with the investable HFRI 500 Equity Hedge Index advancing 3.25 per cent while the HFRI Equity Hedge (Total) Index gained 2.9 per cent. EH sub-strategy performance was led by the HFRI EH: Technology Index, which gained 5.0 per cent for the month, while the HFRI EH: 500 Fundamental Growth Index added 4.4 per cent.

Event-driven strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, also advanced in July as the HFRI Event-Driven (Total) Index rose by 3.0 per cent, while the investable HFRI 500 Event-Driven Index rose by 2.4 per cent for the month. 

Fixed income-based, interest rate-sensitive strategies also gained in July as the Federal Reserve increased interest rates and inflation remained at extreme levels, with the investable HFRI 500 Relative Value Index advancing 1.5 per cent, while the HFRI Relative Value (Total) Index gained 1.1 per cent. 

Macro strategies pared their strong gain for the first six months of the year with a decline in July. The investable HFRI 500 Macro Index fell by 1.5 per cent for the month, lowering year-to-date performance to 11.9 per cent. 

For much of 2022, the ability of macro strategies to defy the decline in the wider stock market reminded investors of hedge funds’ old promise to diversify risks. (To some extent, this explains their “hedge” characteristic.) Macro hedge funds typically attempt to profit from broad market swings caused by political or economic events. The war in Ukraine, for example, and the surge in inflation and rising interest rates, are exactly the kind of changes such funds try to tap into.

“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, driven by global inflationary pressures, uncertain military conflict scenarios and instability in energy markets and supply chains,” Kenneth Heinz, president of HFR, said.