Hedge funds to have bad returns this year amid aggressive interest rate hikes

Hedge funds are expected to report their worst returns in 14 years this year. The returns reported by these financial firms will be affected by the aggressive interest rate hikes in the United States that have triggered a notable decline in asset prices.

Hedge funds to report their worst returns in 14 years

The Federal Reserve has aggressively raised interest rates this year, which will significantly affect the returns made by global hedge funds. However, the declines made by these companies will be notably less compared to the drop in the equity and bond markets.

Some hedge funds had put their funds in commodities and currencies as part of their trading strategy. The hedge funds leveraged macro strategies and the price differences in related securities. By doing this, such hedge funds have outperformed the market in 2022 and delivered notable gains to investors.

According to Reuters, the managing director of hedge fund research at Cambridge Associates, Meisan Lim, said that equities and bonds were susceptible to performing according to the macro environment. The prices of these assets were largely influenced by inflation.

A report by the investment firm Preqin noted that the returns made by hedge funds had dropped 6.5% this year alone. This was the largest drop since the funds reported a 13% drop in 2008 following the housing crisis. Nevertheless, the return drop for hedge funds is significantly less than the MSCI World index, which has dropped by 18.7%, and the ICE BofA US Treasury Index, which has dropped by 11.9%.

Macro funds have reported gains

According to data provided by HFR, macro funds also gained 8.2% in November. On the other hand, the funds using equity-hedged and event-driven techniques have lost 9.7% and 4.7%, respectively.

UBS published a note saying that historically, macro has had a lesser correlation to the performance of the broader stock market. This has been beneficial in diversifying portfolios. UBS further noted that the increasing volatility could be good for macro managers in the coming year if the Fed continued tightening the monetary policy.

The HFR data also addressed activist funds that use minority stakes to support strategy and changes in management. These funds dropped by 13.8%. The high inflation also saw trend-following strategies succeeding in 2022.

According to the head of Asia at Janus Henderson, Andrew Hendry, the trend following was triggered by the assumption that markets do not process information efficiency and that markets move in one direction and continue moving in the same direction. Factors like favorable commodity prices and weak bonds influenced trend following in 2022.

While traditional assets like equities and bonds reported dips, the net assets for global hedge funds dropped by 4.8% in the first nine months of 2022 to $4.3 trillion. These assets reported a total outflow of $109.8 billion during this period. In 2022, 915 funds were launched, the lowest number in a decade.