Hedge funds performed subduedly in July, rising 1.2% for the month and 6.4% year-to-date (YTD), UBS said in a report on Thursday.
Still, hedge funds underperformed both equities and fixed income, driven primarily by challenges in macroeconomic and relative value strategies. However, directional strategies continued to lead performance, and alpha in most strategies remained positive due to significantly lower volatility compared to equities and fixed income.
According to UBS, July was marked by unstable market conditions, with stocks dropping a notable 5% due to concerns about a possible bubble in ai stocks. This was followed by a rally on the last trading day of the month, driven by the Federal Reserve's indication that rate cuts were on the horizon.
Hedge funds, while underperforming, still showed strengths, particularly in directional and event-driven equity strategies, UBS reveals. Managers of various strategies adopted a cautious stance, reducing risk and beta exposure, pending greater clarity on geopolitical and fundamental market conditions.
In long/short equity strategies, managers were aligned with global equities, but alpha generation was a challenge.
“Managers significantly reduced their income due to increased market volatility during the month and the sale of winning positions that had accumulated large profit/loss reserves,” the note said.
Despite the headwinds, certain strategies such as fundamental value and multi-strategies outperformed, while technology-oriented managers faced losses due to reversals in crowded positions.
Event-based strategies outperformed in July, boosted by gains from activist managers and strong activity in corporate markets such as buybacks and mergers. Merger arbitrage saw healthy deal closings and credit arbitrage remained positive, although performance was dampened slightly by losses in communication services.
Meanwhile, macro strategies performed mixed: systematic macro managers struggled, particularly in fixed income and currency trading, while discretionary macro managers outperformed.
Relative value strategies delivered stable returns, with credit strategies leading the way. Convertible arbitrage and structured credit strategies posted gains, although risk levels remained relatively unchanged compared to previous months.
Looking ahead, UBS remains optimistic about the opportunities offered by hedge funds, noting that the environment remains conducive for stock selection and that easing financial conditions could boost M&A and IPO volumes.
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