HFS Bulletin

Monthly hedge fund update – February 2024

Executive summary

Market and hedge fund update in a nutshell

Risk assets maintained upward momentum in February and extended the rally that began late last year. Broader macroeconomic factors gave way to earnings season during the period and the strong results were the main catalyst for the ongoing equity gains.

In Equity Hedged, US Equity Hedged strategies generally produced positive returns in February. Most managers were profitable for the month, as returns were largely driven by idiosyncratic attributions. Technology and biotechnology managers generally outperformed, while managers with a utilities and renewables focus tended to lag. 

Long / short spread and alpha generation was a bit more episodic. European Equity Hedged strategies generally produced positive returns. February was the fourth month in a row where EU equities were net bought. Asian Equity Hedged strategies generally produced positive returns. The market in China rebounded, and the rally in Japan continued.


In Relative Value, Fixed income relative value strategies generated mixed returns in February. Managers with short European swap spread exposure continued to benefit from the compression of swap rates vs. EGB yields, while those who attempted to take the other side incurred losses. Capital structure / volatility arbitrage strategies generally produced positive returns.

Convertible new issuance increased substantially in February accompanied by higher overall trading volume. Merger arbitrage and event-driven strategies generated mixed returns. On average, merger spreads moved approximately 40 basis points wide. Agency MBS strategies generally produced positive returns. Similar to prior months, carry was the primary contributor to performance. Quantitative equity strategies generally produced positive returns. The month was characterized by positive performances across the quant equity market neutral cohort.


In Credit / Income, Corporate credit strategies generally produced positive returns. The corporate long-biased sub-strategy continued to perform well and benefited from the move tighter in spreads.  Gains were primarily attributable to long portfolios as managers benefited from a combination of positive carry and mark-to-market gains. 

At the asset class level, profits were driven by bonds and loans. Asset-backed strategies generally produced positive returns. Carry was the main source of gains, while the mark-to-market impact varied by fund. Reinsurance / ILS strategies generally produced positive returns.


In Trading, Discretionary trading strategies generated mixed performance in February. Developed market (DM) macro managers were broadly challenged during the month, with curve steepening trades, particularly in the US, as well as front-end received bias across the US, UK, and Europe driving underperformance. 

Systematic trading strategies generally produced positive returns. Trend-following strategies generated gains in agriculture via long positions in cocoa, cotton, hogs, long / short equities, equity indices, FX, and fixed income. Energy produced relatively flat returns, while small gains were produced in credit.


Index

Index

24-Feb

24-Feb

24-Jan

24-Jan

23-Dec

23-Dec

QTD

QTD

YTD

YTD

1Y Annualized Return

1Y Annualized Return

3Y Annualized Return

3Y Annualized Return

5Y Annualized Return

5Y Annualized Return

10Y Annualized Return

10Y Annualized Return

Volatility (10Y)

Volatility (10Y)

Index

MSCI World Total Return - Net USD 

24-Feb

4.24

24-Jan

1.2

23-Dec

4.91

QTD

5.49

YTD

5.49

1Y Annualized Return

24.96

3Y Annualized Return

8.64

5Y Annualized Return

11.66

10Y Annualized Return

9.06

Volatility (10Y)

14.9

Index

FTSE US Broad Investment-Grade Bond Index

24-Feb

-1.41

24-Jan

-0.26

23-Dec

3.86

QTD

-1.68

YTD

-1.68

1Y Annualized Return

3.31

3Y Annualized Return

-3.18

5Y Annualized Return

0.58

10Y Annualized Return

1.44

Volatility (10Y)

4.8

Index

Barclays Global High Yield Index

24-Feb

0.79

24-Jan

-0.19

23-Dec

4.03

QTD

0.6

YTD

0.6

1Y Annualized Return

12.25

3Y Annualized Return

0.39

5Y Annualized Return

2.86

10Y Annualized Return

3.44

Volatility (10Y)

8.6

Index

Bloomberg Commodity Index Total Return

24-Feb

-1.47

24-Jan

0.4

23-Dec

-2.69

QTD

-1.08

YTD

-1.08

1Y Annualized Return

-3.94

3Y Annualized Return

7.15

5Y Annualized Return

5.66

10Y Annualized Return

-1.84

Volatility (10Y)

14.14

Index

ICE BofA Merrill Lynch 3-month T-Bill Total Return

24-Feb

0.41

24-Jan

0.43

23-Dec

0.47

QTD

0.84

YTD

0.84

1Y Annualized Return

5.22

3Y Annualized Return

2.43

5Y Annualized Return

1.97

10Y Annualized Return

1.33

Volatility (10Y)

0.47

Index

HFRI Fund of Funds Composite Index

24-Feb

1.94

24-Jan

0.73

23-Dec

2.18

QTD

2.69

YTD

2.69

1Y Annualized Return

7.45

3Y Annualized Return

2.38

5Y Annualized Return

4.91

10Y Annualized Return

3.38

Volatility (10Y)

4.99

Index

HFRI Equity Hedge (Total) Index

24-Feb

3.1

24-Jan

-0.05

23-Dec

4.5

QTD

3.05

YTD

3.05

1Y Annualized Return

11.99

3Y Annualized Return

2.76

5Y Annualized Return

7.6

10Y Annualized Return

5.46

Volatility (10Y)

8.7

Index

HFRI Event-Driven (Total) Index

24-Feb

1.02

24-Jan

-0.06

23-Dec

4.17

QTD

0.96

YTD

0.96

1Y Annualized Return

8.12

3Y Annualized Return

4.01

5Y Annualized Return

6.11

10Y Annualized Return

4.56

Volatility (10Y)

7.11

Index

HFRI ED: Credit Arbitrage Index

24-Feb

1.21

24-Jan

2.22

23-Dec

2.51

QTD

3.45

YTD

3.45

1Y Annualized Return

9.8

3Y Annualized Return

5.2

5Y Annualized Return

6.07

10Y Annualized Return

5.02

Volatility (10Y)

6.86

Index

HFRI Macro (Total) Index

24-Feb

2.68

24-Jan

0.55

23-Dec

0.86

QTD

3.24

YTD

3.24

1Y Annualized Return

2.63

3Y Annualized Return

5.4

5Y Annualized Return

6.1

10Y Annualized Return

3.36

Volatility (10Y)

4.66

Index

HFRI Macro (Total) Systematic Diversified Index

24-Feb

4.57

24-Jan

0.81

23-Dec

-0.06

QTD

5.42

YTD

5.42

1Y Annualized Return

1.29

3Y Annualized Return

5.52

5Y Annualized Return

6.02

10Y Annualized Return

3.06

Volatility (10Y)

7.64

Index

HFRI Relative Value (Total) Index

24-Feb

0.78

24-Jan

0.65

23-Dec

1.29

QTD

1.44

YTD

1.44

1Y Annualized Return

6.49

3Y Annualized Return

3.98

5Y Annualized Return

4.52

10Y Annualized Return

3.98

Volatility (10Y)

4.4

Strategy performance

Monthly hedge fund review

Overall market commentary

Risk assets maintained upward momentum in February and extended the rally that began late last year. Broader macroeconomic factors gave way to earnings season during the period and the strong results, particularly from well-known AI names were the main catalyst for the ongoing equity gains. The results were in spite of the move higher across most interest rate markets as US inflation data served to quell near term expectations of a March interest rate cut from the US Federal Reserve Bank. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced positive performance of 2.22%, 5.17% and 6.12%, respectively. Across Europe, equity market performance was mostly positive in a broadly risk-on climate. The MSCI Europe and DAX generated positive performance of 1.79% and 4.58%, respectively, while the FTSE posted modest losses of 0.24%. Asian developed markets produced positive performance with the Nikkei 225 Index posting a gain of 7.94%, where market sentiment remained strong as the market approached the all-time highs. Emerging market nations generated broadly positive results in February despite higher developed market bond yields. Chinese, Indian and Brazilian equity markets produced gains of 8.13%, 1.04% and 0.99%, respectively. US interest rate markets retreated last month on the back of higher than expected inflation prints. The two-year US Treasury yield increased to 4.62% from 4.21% while the ten-year US Treasury yield increased to 4.26% from 3.91%. The Barclays US Corporate Investment Grade Index weakened 1.50% last month, in line with the move in Treasury yields, while the Barclays US Corporate High Yield Index rose 0.29%, where carry income tended to offset the move in bond prices. Commodity prices were again mixed with crude oil rising 3.4% while gold edged lower by 0.6%. In currency markets, the Euro rose 0.85% against the US dollar to 1.0895 from 1.0803 while the US dollar rallied 2.36% against the Japanese Yen from 146.18 to 149.64.

Equity Hedged

US Equity Hedged strategies generally produced positive returns in February. Most managers were profitable for the month, as returns were largely driven by idiosyncratic attributions. Technology and biotechnology managers generally outperformed, while managers with a utilities and renewables focus tended to lag. Long / short spread and alpha generation was a bit more episodic in February compared to January, particularly during the final few days of the month when highly shorted areas of the market rallied, notably unprofitable technology stocks. Nonetheless, most managers produced sufficient positive alpha on the long side to more than offset negative short alpha. Also, the continued trend higher in long / short ratios was also supportive to performance. US equity markets experienced strength across the board, with small capitalization stocks also participating, representing a reversal from January. In terms of sectors, performance was strongest in the consumer discretionary and industrial sectors and weakest in the utilities and consumer staples sectors. Strength in consumer discretionary sector was associated with headwinds for some managers’ short portfolios. This type of backdrop resulted in relative outperformance of the realized volatility and momentum factors, while quality was a slightly negative driver.

European Equity Hedged strategies generally produced positive returns in February. February was the fourth month in a row where EU equities were net bought. Long buying surpassed short selling in a 2 to 1 ratio in the space. The most net bought sector was industrials, followed by healthcare sector. Mega cap names accounted for a large portion of net buying, with crowded long positions as a percentage of total long exposure at relatively high levels. Across the industry, the most net sold sectors were consumer discretionary as well as consumer staples. European fund alpha relative to the MSCI EU Index was generally negative in February. Generalist and sector specialist funds underperformed, while multi-PMs generated mostly positive alpha for the month. In terms of sector specialists, industrials generated the worst performance, while energy specialists tended to be more muted. In terms of sectors, markets rewarded cyclicals and technology names, while energy declined. Automotives, luxury, consumer discretionary, technology and semiconductors were positive for the month, while miners, renewables, real estate and utilities lagged. In terms of factors, momentum outperformed, while quality and volatility performed positively. Value factors typically lagged during the month.

Asian Equity Hedged strategies generally produced positive returns in February. The market in China rebounded, and the rally in Japan continued. Japanese shares continued to trade higher as the Nikkei hit a 34-year high on the back of strong earnings delivery as well as multiple expansion, while the Yen depreciated another 2.1% to break the 150 level again. Momentum and size factors continued to perform well, while quality and the low risk factor lagged on the back of the strong market. In China, February was marked by significant intra-month volatility among the small capitalization companies amid derivative products unwinding, while large capitalization stocks were mostly positive, driven by further policy and state support. Overall, the market in China finished the month significantly higher in February and recouped much of losses incurred in January.

HFRI Equity Hedge Total Index:

MTD 3.10%

QTD 3.05%

YTD 3.05%

Relative Value

HFRI Relative Value Total Index:

MTD 0.78%

QTD 1.44%

YTD 1.44%

Fixed income relative value strategies generated mixed returns in February. Managers with short European swap spread exposure continued to benefit from the compression of swap rates vs. EGB yields, while those who attempted to take the other side incurred losses. US cash / futures basis trading was generally profitable for most managers, but European and JGB basis was more challenged. Many FIRV managers ventured into directional US rates receivers coming into February, but this theme was challenged as FOMC cuts were rapidly priced out following strong US CPI data and hawkish rhetoric from policymakers. Tail hedges, such as country spread wideners in Europe and front-end basis wideners, also detracted from performance.

Capital structure / volatility arbitrage strategies generally produced positive returns in February. After a slow start to the year, convertible new issuance increased substantially in February, bringing about USD 8bn to the market, which was also accompanied by higher overall trading volume. Deals that came to the market were predominantly attractively priced, and benefited from solid demand, which resulted in many deals trading well. Activity also included buybacks and exchanges. All these factors led to the strongest hedge fund performance since the mini dislocation in October 2023. In February, non-investment grade convertible bond spreads were up +1bp to 562bps, and the spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index increased to +278bps from +240bps last month.

Merger arbitrage and event-driven strategies generated mixed returns in February. On average, merger spreads moved approximately 40 basis points wider. Some notable events in February included Olink, the acquisition target of Thermo Fisher; Capril, the acquisition target of Tapestry; and Albertsons, the acquisition target of Kroger. North American M&A deal activity sustained its solid pace as nine deals sized above USD 1bn were announced in February. Year-to-date US M&A deal numbers were up approximately +46% compared to the same time last year. Transaction volumes in the US market were more than 2x higher year-over-year, driven by large strategic dealmaking activities, including Novo Holding’s USD 17bn acquisition of Catalent and the first sizeable banking deal, Capital One’s USD 35bn acquisition of Discover. Sector-wise, technology continued to lead deal activity as nine over USD 1bn technology deals were announced in February, the highest total since April 2022.

Agency MBS strategies generally produced positive returns in February. Similar to prior months, carry was the primary contributor to performance. The Agency MBS allocations continued to benefit from long investments in mortgage derivatives as the cash flow profile continued to be stable due to sustained slow prepayment speeds. In addition, managers also benefited from spread tightening in mortgage derivatives, which performed well based on strong fundamentals.

Quantitative equity strategies generally produced positive returns in February. The month was characterized by positive performances across the quant equity market neutral cohort, with prime brokers reporting systematic managers were strongly positive in February. Prime brokers also noted some marginal de-grossing activity across quants, which was consistent with our internal measures that showed somewhat moderating exposure to momentum. However, gross market value levels remained elevated versus history. Volatility and dividend yield were headwinds during the month, while size and quality worked well. After the spike in volatility around mid-month, we observed a sharp recovery in quant performance toward the third week of February as the environment normalized.

Credit / Income

Corporate credit strategies generally produced positive returns in February. The corporate long-biased sub-strategy continued to perform well and benefited from the move tighter in spreads in February. Gains were primarily attributable to long portfolios as managers benefited from a combination of positive carry and mark-to-market gains. At the asset class level, profits were driven by bonds and loans. In addition to the US and European investments, select positions in emerging markets also performed well. The corporate long / short sub-strategy exhibited the highest levels of dispersion in February. Managers with short-biased portfolios underperformed relative to the managers with net long biases. As a result, gains were driven by long investments, while short positions generated losses. Overall, long positions in emerging markets and Europe were the largest contributors to performance. Credit markets generated positive returns in most segments as credit spreads tightened in February. However, fixed rate bonds underperformed because of the increase in mortgage rates. Non-investment grade bonds generated gains, while investment grade credit incurred modest losses. Within non-investment grade, leveraged loans and CCC debt tended to outperform.

Asset-backed strategies generally produced positive returns in February. Carry was the main source of gains, while the mark-to-market impact varied by fund. In terms of asset class performance, CLOs and Reg Cap were the key contributors to performance. In addition, CMBS investments also performed well. Conversely, some of the legacy RMBS positions underperformed following the move higher in rates.

Reinsurance / ILS strategies generally produced positive returns in February. February was essentially a no-loss month for both catastrophe (cat) bond and collateralized reinsurance managers. As a result, the primary driver of returns was premium income. Managers also benefitted from spread tightening as demand outstripped supply during the month; this was the result of the dollar volume of maturing cat bonds exceeding the new issue supply. Some managers expect there will be more new issues that will hit the market in the coming months, which should serve to prevent a material amount of additional spread tightening.

HFRI ED: Credit Arbitrage Index

MTD 1.21%

QTD 3.45%

YTD 3.45%

Trading

HFRI Macro Total Index:

MTD 2.68%

QTD 3.24%

YTD 3.24%

Discretionary trading strategies generated mixed performance in February. Developed market (DM) macro managers were broadly challenged during the month, with curve steepening trades, particularly in the US, as well as front-end received bias across the US, UK, and Europe driving underperformance. Notably, a couple of exceptions existed where some managers had a more hawkish positioning and tactically traded, particularly across the front-end, which led to outperformance. Japan rates generally contributed positively, particularly for managers that were more positioned in the front-belly part of the curves. FX contributions were generally lighter, with some underperformance on JPY longs but gains from shorts in CHF, CNH and carry trades in Latam. Equities were a positive driver, with some managers generating material gains on long bias in the US and Japan, while others benefited more from long / short trading across the technology sector. Commodities were mostly mixed, given varied semi-systematic relative value and directional trading, energy positions, as well as long positions in copper and gold. Emerging market (EM) managers produced mixed results, with EM receiver trades largely challenged given the market moves, albeit some of the long exposure to Czech and China as well as short exposure in Chile, partly offset the losses. DM rates trading yielded varied results across EM managers, with some managers underperforming on the received bias and/or struggling with timing of more tactical traders in core rates, while others benefitted from tactically repositioning into front-end short exposure in the US. Similarly in FX, some managers profited from frontier long positions; others incurred losses from a mix of tactical EM/DM FX trading. Managers with larger long exposures in credit outperformed, capturing the spread compression and some of the more idiosyncratic stories in CEMEA and Latam space.

Systematic trading strategies generally produced positive returns in February. Trend-following strategies generated gains in agriculture via long positions in cocoa, cotton, hogs, long / short equities, equity indices, FX, and fixed income. Gains were partially offset by losses incurred within metals and industrials. Energy produced relatively flat returns, while small gains were produced in credit. Alternative market managers produced gains from agriculture, equities, energy, and currencies, while losses were incurred from other asset classes. Key drivers to performance were the continued decline in the price of European energy markets, most notably in carbon emissions and natural gas. Long equity positions generally benefited from improved sentiment. Gains in FX were driven by long USD crosses due to diminishing prospects of near-term rate cuts. Fixed income exposures were challenged, and net exposure was reduced drastically by the end of the month. Systematic managers with more diversified alpha models were mostly positive for the month with gains in short fixed-income and FX positions despite modest losses from short exposure to agriculture and metals.

Endnotes

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