HFRI 500 Extends Gains Through July Led by Technology & Financials

08/07/2023 Market Commentary

Extending prior month trend, Event, Equity lead broad-based gains;
Shareholder Activist, Technology & Commodity lead sub-strategies
CHICAGO, (August 7, 2023) – Hedge funds extended their June performance surge through July, once again led by Technology, AI and Growth, with gains in these areas complemented by Shareholder Activist, Financials and Commodity sub-strategies as many U.S. companies posted better than expected earnings, the U.S. Fed raised interest rates while inflationary pressures showed additional signs of easing. The investable HFRI 500 Fund Weighted Composite Index advanced +1.7 percent (estimated) in July, following the strongest monthly gain since February 2021 in June, according to data released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry. The HFRI Fund Weighted Composite Index® (FWC) also advanced in July, gaining an estimated +1.5 percent, similarly driven by Event Driven and Equity Hedge strategies.
Performance dispersion ticked lower again in July, as the top decile of the HFRI FWC constituents advanced by an average of +9.3 percent, while the bottom decile fell by an average of -3.8 percent, representing a top/bottom dispersion of 13.1 percent for the month. By comparison, the top/bottom performance dispersion in June was 14.1 percent. Through the first seven months of the year, the top decile of FWC constituents gained +30.3 percent, while the bottom decile declined -12.8 percent, representing a top/bottom decile of 43.0 percent. Approximately 70 percent of hedge funds posted positive performance in July.
Event-Driven strategies, which often focus on out-of-favor, deep value equity exposures and speculation on M&A situations, led strategy gains in July, driven by Shareholder Activist and Multi-Strategy sub-strategies. The investable HFRI 500 Event-Driven Index jumped +2.9 percent (estimated) for the month, while the HFRI Event-Driven (Total) Index added +2.6 percent. ED sub-strategy performance was led by the HFRI ED: Activist Index, which surged an estimated +3.7 percent in July, the HFRI ED: Special Situations Index, which jumped +3.4 percent, and the HFRI ED: Multi-Strategy Index, which added +2.7 percent for the month. Through the first seven months of 2023, the HFRI Event-Driven (Total) Index gained +5.1 percent.
Equity Hedge funds, which invest long and short across specialized sub-strategies, also drove industry-wide gains in July, driven by Technology, Growth & AI exposures, which were complemented by gains in Energy & Financials. The HFRI 500 Equity Hedge (Total) Index surged +2.7 percent in July, while the HFRI Equity Hedge (Total) Index advanced +2.0 percent for the month. EH sub-strategy gains were led by the HFRI 500 EH: Technology Index, which vaulted +4.5 percent in July, and the HFRI 500 EH: Fundamental Value Index (which includes exposure to Financials), which gained +3.2 percent. Through the first seven months of 2023, the HFRI Equity Hedge (Total) Index led strategy performance, advancing +7.8 percent.
Fixed income-based, interest rate-sensitive strategies also advanced in July, as the Federal Reserve raised interest rates and inflationary pressures eased, while regional banking volatility subsided. The HFRI 500 Relative Value Index gained an estimated +1.0 percent for the month, while the HFRI Relative Value (Total) Index advanced +0.9 percent (estimated). RV sub-strategies were led by the HFRI 500 RV: FI-Sovereign Index, which gained +4.3 percent in July, and the HFRI 500 RV: Asset Backed Index, which added +2.0 percent.
Uncorrelated Macro strategies also gained in July, led by Commodity and fundamental Discretionary Thematic strategies. The HFRI Macro (Total) Index gained +0.5 percent for the month, while the investable HFRI 500 Macro Index added an estimated +0.1 percent. The HFRI Macro: Commodity Index jumped +3.8 percent in July, while the HFRI 500 Macro: Discretionary Thematic Index advanced +2.2 percent. Liquid Alternative UCITS strategies also posted gains in July, with the HFRX Global Index advancing +0.52 percent, led by the HFRX Event Driven Index, which gained +0.93 percent, and the HFRX Relative Value Index, which added +0.90 percent for the month. The HFRI Diversity Index jumped +2.6 percent in July, while the HFRI Women Index added +1.4 percent.
“Hedge funds extended the June surge through July, with powerful gains concentrated in Event Driven and Equity Hedge pacing broad based gains in less correlated strategies, with similar trends driving performance, including Technology, Financials and M&A transactional finance exposures.  While gains were driven by these dynamic exposures, industry performance was strong across-the-board, as all four main strategies advanced for the month,” stated Kenneth J. Heinz, President of HFR. “Powerful Technology and AI trends were complemented by a strong equity beta tailwind as banks recovered from the recent volatility while inflationary pressures eased, increasing expectations for a stronger than anticipated second half of 2023, including pricing in a near term end of the interest rate raising cycle. While these trends have been favorable in the short term, institutional investors looking to access to these specialized, powerful trends while remaining both defensive and opportunistic through periods of volatility are likely to allocate and expand commitments to managers which have demonstrated their capacity and capabilities through the early stages of this transformative market dynamic.”
Comments reference Flash Update performance figures as posted on August 7th, 2023.