Hedge funds resume ‘risk-on’ stance

The global hedge fund industry, stinging from losses in June, piled back into ‘risk-on’ assets in July and regained its losses.

Easing concerns of sharp interest rate increases, perceptions of lower macroeconomic risks and a pickup in mergers and acquisitions prompted hedge funds to increase investments in equities and other instruments seen as carrying a higher level of risk. The move paid off, leading funds to nearly across-the-board gains in July.

The HFRI Fund Weighted Composite Index, a broad measure of global hedge fund industry performance, rose 1.4 percent in July, more than making up for the 1.3 percent decline suffered in June as hedge funds shied away from riskier assets, according to industry analysis and consulting firm Hedge Fund Research (HFR). In the first seven months of the year, the composite index has gained 4.7 percent.

Investment in equities led gains, with the HFRI Equity Hedge Index rising 2.5 percent in the month, HFR data shows. Investments in technology sector equities proved the most profitable, with the HFRI Technology/Healthcare Index increasing 4 percent. The worst-performing hedge fund investment strategy in July was shorting equities, with the HFRI Short Bias Index dropping 2.9 percent.

‘In sharp contrast to the volatile, risk-off sentiment of the prior month, hedge fund performance in July was driven by a positive tone to earnings season and a dynamic environment for M&A including strategic transactions and shareholder activist and special situations exposures, contributing to a favorable operating environment for long/short strategies,’ says Kenneth Heinz, president of HFR, in a press release. 

‘While many managers continue to position for a gradual extraction of stimulus measures by the US Federal Reserve and correspondingly rising bond yields, fundamentally driven, valuation-oriented strategies produced strong results in July as risk-off sentiment moderated from the prior month and investor risk tolerance continued to normalize.’