HFS Bulletin

Monthly hedge fund update – April 2024

Executive summary

Market and hedge fund update in a nutshell

Risk assets generally retreated in April as investors digested continued higher US forecast inflation metrics. This recent inflation data (CPI) series served to delay expectations for interest rate cuts as well as reduced the magnitude of forecasted monetary easing for the balance of the year from the US Federal Reserve. 

In Equity Hedged, US Equity Hedged strategies generally produced negative returns. The period was decidedly risk-off as the reality of a ‘higher for longer’ rate environment finally appeared to settle in after another series of higher-than-expected inflation prints. European Equity Hedged strategies generally produced negative returns. While managers generally produced positive alpha during the month amid a negative tape, generalist funds were relatively flat, while sector specialists with exposure to energy outperformed. Asian Equity Hedged strategies generated mixed returns. The broader Chinese market rallied, while Japan and AI-related themes were challenged during the month.


In Relative Value, Fixed income relative value strategies generally produced positive returns. Most managers maintained low risk levels / high cash and maintained their tail hedging strategies. Capital structure / volatility arbitrage strategies generated mixed returns. As market participants were concerned about the rates, and the equity markets struggled during the month, convertible bond new issuance market was relatively quiet. Merger arbitrage and event-driven strategies generally produced negative returns. There was significant activity in terms of deals as 15 public deals, each sized USD 1bn and above, were announced throughout the month, totaling approximately USD 78bn. Agency MBS strategies generally produced positive returns. Managers were generally positive as gains were attributable to a combination of positive carry and spread tightening on mortgage derivatives. Quantitative equity strategies generated mixed returns. During the month, the quantitative equity market neutral cohort produced mixed but broadly positive performance. Prime brokers also reported positive performance for systematic managers.


In Credit / Income, Corporate credit strategies generated mixed returns. The corporate long-biased sub-strategy produced gains. All funds finished the month in positive territory as long investments in bonds and loans drove performance. Asset-backed strategies (ABS) generally produced positive returns. Most of the funds produced gains as profits were primarily driven by carry. Reinsurance / ILS strategies generally produced positive returns. April was essentially a no-loss month for both catastrophe (cat) bond and collateralized reinsurance managers.


In Trading, Discretionary trading strategies generated mixed returns. During the month, DM macro performance was somewhat mixed as managers with a more hawkish bias in rates and long exposure in commodities, particularly gold and copper, outperformed those that held onto the receiver bias and curve steepening trades. Systematic trading strategies generally produced positive returns. Trend-following strategies generated gains from commodities, currencies, fixed income, while losses occurred in equities, credit, and metals.


Index

Index

Apr-24

Apr-24

Mar-24

Mar-24

Feb-24

Feb-24

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 

Apr-24

-3.71

Mar-24

3.21

Feb-24

4.24

QTD

-3.71

YTD

4.84

1Y Annualized Return

18.39

3Y Annualized Return

5.63

5Y Annualized Return

10.46

10Y Annualized Return

8.87

Volatility (10Y)

14.98

Index

FTSE US Broad Investment-Grade Bond Index

Apr-24

-2.47

Mar-24

0.85

Feb-24

-1.41

QTD

-2.47

YTD

-3.29

1Y Annualized Return

-1.51

3Y Annualized Return

-3.62

5Y Annualized Return

-0.15

10Y Annualized Return

1.21

Volatility (10Y)

4.87

Index

Barclays Global High Yield Index

Apr-24

-0.84

Mar-24

1.51

Feb-24

0.79

QTD

-0.84

YTD

1.27

1Y Annualized Return

11.25

3Y Annualized Return

0.29

5Y Annualized Return

2.72

10Y Annualized Return

3.34

Volatility (10Y)

8.61

Index

Bloomberg Commodity Index Total Return

Apr-24

2.69

Mar-24

3.31

Feb-24

-1.47

QTD

2.69

YTD

4.94

1Y Annualized Return

2.89

3Y Annualized Return

7.19

5Y Annualized Return

7.04

10Y Annualized Return

-1.54

Volatility (10Y)

14.19

Index

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

Apr-24

0.43

Mar-24

0.45

Feb-24

0.41

QTD

0.43

YTD

1.73

1Y Annualized Return

5.36

3Y Annualized Return

2.73

5Y Annualized Return

2.07

10Y Annualized Return

1.42

Volatility (10Y)

0.49

Index

HFRI Fund of Funds Composite Index

Apr-24

-0.11

Mar-24

1.69

Feb-24

1.74

QTD

-0.11

YTD

4.11

1Y Annualized Return

9.30

3Y Annualized Return

2.14

5Y Annualized Return

4.80

10Y Annualized Return

3.64

Volatility (10Y)

4.99

Index

HFRI Equity Hedge (Total) Index

Apr-24

-1.59

Mar-24

2.06

Feb-24

3.06

QTD

-1.59

YTD

3.46

1Y Annualized Return

12.36

3Y Annualized Return

1.80

5Y Annualized Return

7.22

10Y Annualized Return

5.62

Volatility (10Y)

8.72

Index

HFRI Event-Driven (Total) Index

Apr-24

-1.38

Mar-24

1.64

Feb-24

0.74

QTD

-1.38

YTD

0.93

1Y Annualized Return

9.92

3Y Annualized Return

2.80

5Y Annualized Return

5.85

10Y Annualized Return

4.53

Volatility (10Y)

7.14

Index

HFRI ED: Credit Arbitrage Index

Apr-24

0.15

Mar-24

1.01

Feb-24

1.12

QTD

0.15

YTD

4.57

1Y Annualized Return

12.38

3Y Annualized Return

4.89

5Y Annualized Return

5.85

10Y Annualized Return

5.07

Volatility (10Y)

6.86

Index

HFRI Macro (Total) Index

Apr-24

0.86

Mar-24

3.23

Feb-24

2.39

QTD

0.86

YTD

7.19

1Y Annualized Return

8.61

3Y Annualized Return

5.53

5Y Annualized Return

6.37

10Y Annualized Return

3.84

Volatility (10Y)

4.72

Index

HFRI Macro (Total) Systematic Diversified Index

Apr-24

0.88

Mar-24

4.08

Feb-24

4.52

QTD

0.88

YTD

10.63

1Y Annualized Return

9.34

3Y Annualized Return

5.84

5Y Annualized Return

6.08

10Y Annualized Return

3.72

Volatility (10Y)

7.71

Index

HFRI Relative Value (Total) Index

Apr-24

0.26

Mar-24

1.05

Feb-24

0.82

QTD

0.26

YTD

2.81

1Y Annualized Return

8.12

3Y Annualized Return

3.87

5Y Annualized Return

4.51

10Y Annualized Return

4.01

Volatility (10Y)

4.41

Source returns: UBS Hedge Fund Solutions

Strategy performance

Monthly hedge fund review

Overall market commentary

Risk assets generally retreated in April as investors digested continued higher US forecast inflation metrics. This recent inflation data (CPI) series served to delay expectations for interest rate cuts as well as reduced the magnitude of forecasted monetary easing for the balance of the year from the US Federal Reserve. This pause in risk-on market dynamics in April was the first in several months that featured a still resilient US economy in spite of the higher interest rate landscape. The Dow Jones Industrial Average, S&P500 and NASDAQ indices produced negative performance of 5.00%, 4.16% and 4.41%, respectively. Across Europe, equity market performance was more mixed as the monetary policy outlook remained more dovish, especially for the UK. The MSCI Europe and DAX generated negative performance of 1.45% and 3.03%, respectively, while the FTSE produced a gain of 2.13%. Asian developed markets produced negative performance with the Nikkei 225 Index falling 4.86%, in line with the broader weakness across developed markets, despite further weakening of the Japanese yen. Emerging markets generated mixed results in April as Brazilian and Indian equity markets retreated 1.7% and 1.13% respectively, while the Chinese market rebounded further, gaining 2.09%. US interest rate markets were broadly weaker on the back of the elevated inflation prints. The two-year US Treasury yield rose to 5.04% from 4.59% and the ten-year US Treasury yield increased to 4.68% from 4.20%. The Barclays US Corporate Investment Grade Index fell 2.54% in April, driven in large part by the retreat in Treasury yields. Similarly, the Barclays US Corporate High Yield Index lost 0.94%, where carry income partially offset the jump in interest rates. Commodity prices were also mixed as inflation pressure supported gold prices while the energy complex was more muted. Crude oil eased 0.6% last month while gold advanced 2.9%. In currency markets, the Euro fell 1.10% against the US dollar to 1.0668 from 1.0787, while the US dollar rallied another 3.96% against the Japanese yen from 151.34 to 157.34.

Equity Hedged

US Equity Hedged strategies generally produced negative returns in April. The period was decidedly risk-off as the reality of a ‘higher for longer’ rate environment finally appeared to settle in after another series of higher-than-expected inflation prints. Notable exceptions were energy-focused approaches and select market generalists. Technology and healthcare managers were challenged the most by the environment with directional biotechnology managers most negatively impacted. Small capitalization stocks also underperformed, while more defensive sectors, such as utilities, tended to outperform. From a factor perspective, the sharp upward moves in interest rates pressured growth and realized volatility, while quality and value factors were positive drivers of performance. The weakest market sector was consumer stocks, both discretionary and staples, likely driven by concerns over purchasing power. Finally, it was an overall a positive alpha month with most of the alpha generation emerging from the short side.

European Equity Hedged strategies generally produced negative returns in April. While managers generally produced positive alpha during the month amid a negative tape, generalist funds were relatively flat, while sector specialists with exposure to energy outperformed. Sector wise, consumer and financials lagged, while the energy complex was an exception. Accordingly, while autos, luxury, financials, and travel and leisure were negative for the month, miners, renewables, and healthcare were positive for the month. In terms of factors, value outperformed, while quality and volatility both lagged, along with momentum. Prime brokers reported that April was the first month in which European equities were net sold after 5 consecutive months of net buying, and it was the only net sold region for the month. There was a 4 to 1ratio of short selling to long buying over the month, primarily driven by macro products. The most net bought sector was technology and industrials, while consumer discretionary and staples were the most net sold.

Asian Equity Hedged strategies generated mixed returns in April. The broader Chinese market rallied, while Japan and AI-related themes were challenged during the month. After a strong Q1, markets in Japan were weaker in April as there was a strong momentum unwinding, driven by index selling. In China, the market staged a strong rally in the second half of the month, driven by the better-than-expected macro data and earnings which helped stage a rebound in inflows to the Chinese market.

HFRI Equity Hedge Total Index:

MTD -1.59%

QTD -1.59% 

YTD 3.46%

Relative Value

HFRI Relative Value Total Index:

MTD 0.26%

QTD 0.26%

YTD 2.81%

Fixed income relative value strategies generally produced positive returns in April. Most managers maintained low risk levels / high cash and maintained their tail hedging strategies. US relative value trading added to gains for most managers through the core cash / futures basis and bond RV strategies. Global cross-currency basis and tenor basis positions were generally additive over the month. In general, European RV trades, both in cash / futures basis and country RV detracted during the month. Macro strategies were gener-ally challenged as a received bias in US rates continued to struggle versus stronger US data and hawkish Fed rhetoric. The exception was Japanese rates short exposure which performed well.

Capital structure / volatility arbitrage strategies generated mixed returns in April. As market participants were concerned about the rates, and the equity markets struggled during the month, convertible bond new issuance market was relatively quiet. Approximately USD 3.7bn of new convertible paper came to the global market. The US saw USD 933m of new issuance from one new deal. Europe offered three new deals totaling around USD 454m, and Asia priced two new deals for a total of USD 297m, the first new issuance for each region since January. In April, non-investment grade convertible bond spreads continued to tighten -16bps to 493bps, and the spread between non-investment grade convertibles and the Bloomberg HY ‘B’ Index decreased to +213bps from +243bps.

Merger arbitrage and event-driven strategies generally produced negative returns in April. There was significant activity in terms of deals as 15 public deals, each sized USD 1bn and above, were announced throughout the month, totaling approximately USD 78bn. The most notable transactions included J&J’s USD 13bn acquisition of Shockwave; Silver Lake’s USD 13bn acquisition of EDR; and Blackstone’s USD 10bn acquisition of AIRC. The market experienced an increase in sponsor activity with 6 transactions, accounting for approximately UDS 35bn in total deal value. Throughout the month, the US arbitrage potential profit pool increased by about 19% due to new deal activity combined with a broader spread widening. Equity capital markets managers generated mostly positive returns in April. Despite April’s usual earnings season activity, the US ECM activity amounted to USD 11bn via 35 offerings. US IPOs contributed most of the dollar volume, with USD 5.6bn raised via 9 offerings. All IPOs last month priced within or above the initial range, with 33% pricing above. Some of the notable deals included Viking, Rubrik, Ibotta, and Puig.

Agency MBS strategies generally produced positive returns in April. Managers were generally positive as gains were attributable to a combination of positive carry and spread tightening on mortgage derivatives. Spreads tightened across the coupon stack because of the move in rates and a favorable prepayment report.

Quantitative equity strategies generated mixed returns in April. During the month, the quantitative equity market neutral cohort produced mixed but broadly positive performance. Prime brokers also reported positive performance for systematic managers. The challenging market environment offered positive alpha opportunities for high frequency strategies as their fast-moving signals reaped the benefits of heightened volatility. Quality factors worked well as investors searched for capital protection in a down market. Crowding and short interest also contributed positively, while momentum factors were more mixed. We observed market versus between sector dispersion moving higher, suggesting the higher importance of micro drivers and a relatively large alpha pool. However, we also observed a slight decrease in within sector versus market dispersion, suggesting higher intra-sector correlation to extract sector-neutral alpha.

Credit / Income

Corporate credit strategies generated mixed returns in April. The corporate long-biased sub-strategy produced gains in April. All funds finished the month in positive territory as long investments in bonds and loans drove performance. In addition, rate and equity index hedges were also additive to performance. Overall, the HFS allocations outperformed relative to indices due to a positive catalyst for one of the core long investments. In corporate long / short, the sub-strategy produced mixed results in April. In aggregate, the sub-strategy was flat to down. There was a reasonable amount of dispersion in terms of performance between long and short positions. However, long positions generally detracted from performance, while short positions were profitable.

Asset-backed strategies (ABS) generally produced positive returns in April. Most of the funds produced gains as profits were primarily driven by carry. CLO equity investments generally outperformed. In addition, investments in synthetic risk transfer (SRT), CRT, and short duration ABS were also additive to performance. Conversely, positive duration RMBS investments generated losses due to the rate move.

Reinsurance / ILS strategies generally produced positive returns in April. April 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. Although, spread widening partially offset the premium carry as new issue supply volume exceeded that of maturing bonds during the month. Historically spreads have typically widened during the spring months because of the oncoming hurricane season, as we observed also in April. Pricing within the cat bond market generally seemed more attractive this month as supply and demand were in better balance than they were during Q1.

HFRI ED: Credit Arbitrage Index

MTD 0.15%

QTD 0.15%

YTD 4.57%

Trading

HFRI Macro Total Index:

MTD 0.86%

QTD 0.86%

YTD 7.19%

Discretionary trading strategies generated mixed returns in April. During the month, DM macro performance was somewhat mixed as managers with a more hawkish bias in rates and long exposure in commodities, particularly gold and copper, outperformed those that held onto the receiver bias and curve steepening trades. Japanese short rates exposure was additive. Managers with long exposure to the US dollar also fared better, while long exposure in LatAm carry currencies and JPY underperformed. Equity contribution was slightly negative as most maintained a net long bias, albeit tactical trading around the positions seemed to have offset some of the losses. Within EM, managers were generally challenged during the month across a mix of receiver trades both in EM, but also in some of the core rates markets, such as the US. There were a couple of exceptions as some managers traded more tactically from the short side. At the same time, FX, including some of the idiosyncratic frontier stories, such as Egypt, was also challenged for the month amid the stronger US dollar and geopolitical tensions in the Middle East. In commodities, energy managers experienced mixed performance as short exposure in EU natural gas detracted, and US gas trading was profitable. Within EM macro, risk levels have remained largely intact. Idiosyncratic stories, such as Egypt and Nigeria, remained popular across managers, with some also increasing exposure in Türkiye. EM receivers continued to be present, albeit noting some selective hedging there either with core rates or selective shorts in places like Chile and Brazil.

Systematic trading strategies generally produced positive returns in April. Trend-following strategies generated gains from commodities, currencies, fixed income, while losses occurred in equities, credit, and metals. Top contributors were short positions in the Japanese yen and short positions in the short end of the US yield curve. Alternative market managers produced mixed performance. Gains were concentrated in currencies, fixed income, and metals, while losses were incurred from equities, commodities, and credit. Top contributors were long positions in coffee, gold, and short positions in swaps. Key detractors included short positions in wheat, nickel, emissions contracts and long positions in the Mexican peso and the US HY CDX index. Gains in systematic managers with more diversified alpha models were primarily driven by short positions in interest rates, as well as from currencies, equities, and agriculture. Losses were incurred in metals positions. Short exposures generally increased in fixed income and currencies by the end of the month, and metals had switched to a net long exposure.

Endnotes

C-05/24 CRVCX-2539

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