After a second straight negative month in September, hedge funds largely remain in the green year to date, although there is a significant cap in the performance readings from two reputable tracking firms. Hedge funds administered by Citco generated a weighted-average decline of 0.4% for September, bringing their year-to-date return to 8.12% for the first three quarters.
Meanwhile, the PivotalPath Composite Index was essentially flat for September, bringing its year-to-date return to 4.5%. For September, the S&P 500 fell 4.8%, while the Nasdaq tumbled 6%. Year to date, the indices are up 13.1% and 26.3%, respectively. For September, PivotalPath cited key concerns for hedge funds as interest rates and worries about a global recession or so-called “hard landing.”
Best- and worst-performing strategies among Citco-administered funds
According to Citco, 73.2% of the funds it administers have generated positive returns for 2023 after three quarters. PivotalPath recorded a similar percentage, with 75% of the funds it tracks in the green for 2023 so far, with an average return of 9.1%.
There was a significant reversal from previous quarters, with global macro funds taking the lead with a weighted-average return of 3.07% for the third quarter. Fixed-income arbitrage funds came in at a close second place with weighted-average returns of 3.02%, followed by commodities funds with a third-quarter return of 1.85%.
Although global macro and commodities funds saw their year-to-date returns improve significantly after the third quarter, they remain in the red year to date, down 1.67% and 2.57%, respectively, for the first nine months of 2023. Fixed-income arbitrage funds are now up 8.61% year to date on a weighted-average basis.
On the other hand, multi-strategy and equities funds notched losses for September, losing 0.06% and 0.05%, respectively. However, they continue to lead the way on a year-to-date basis, up 10.22% and 9.84%, respectively.
The worst-performing strategy during the third quarter was event-driven funds, whose weighted-average return plummeted 7.37%, widening the losses recorded in the previous quarter. Year to date, event-driven funds are now down 5.89%.
Top and bottom strategies for PivotalPath
Meanwhile in September, PivotalPath’s best-performing strategy was managed futures, which gained 2.8%, followed by global macro, which gained 1.9%. On the other hand, the firm’s worst-performing strategies were the equity sector, which declined 1.8%, followed by equity diversified, which fell 1.2%.
On a year-to-date basis, PivotalPath reported that equity sector funds are leading the way with a return of 6.1%, followed by credit funds with a return of 5.9%. Every strategy tracked by the firm is in the green year to date, although the worst performers so far in 2023 are volatility trading with a 1.2% return and global macro with a gain of 2.2%.
The credit funds tracked by PivotalPath generated the most alpha at 6.3% during the third quarter, followed closely by multi-strategy funds with 6.2% alpha. On the other hand, managed futures generated the least alpha at 2.1%, followed by event-driven funds with 3.2% alpha.
Hedge fund performance by size Among
Citco-administered funds, hedge funds with $500 million to $1 billion generated the best weighted-average return for the third quarter at 1.41%, followed by funds with $200 million to $500 million, which returned 0.9% Unlike previous quarters, all the other size groups tracked by Citco were negative. The smallest funds with less than $200 million in assets recorded the lowest weighted-average return at -0.31%, followed by funds with over $3 billion at -0.22%.
Given the positive performances during the first two quarters, the muted third-quarter losses had minimal impacts on each size group’s year-to-date returns. Funds with over $3 billion in assets are leading the way with a year-to-date return of 10.29%, followed by funds with $500 million to $1 billion at 8.07%. However, the smallest funds with less than $200 million are the worst performers for Citco, generating a weighted-average return of 1%.
Meanwhile, only one size group tracked by PivotalPath was in the green for September, with funds managing $2.5 billion to $5 billion averaging a gain of 0.63%. The worst-performing size groups were $1 billion to $2.5 billion with a loss of 0.49%, followed closely by funds with $500 million to $1 billion, which lost 0.47% in September. Funds with $100 million to $250 million were down 0.44%, while funds with $250 million to $500 million lost 0.41%.
Capital flows for Citco-administered funds
Overall, Citco-administered funds shed $12.7 billion on a net basis during the third quarter, notching an increase in net outflows versus the second quarter. Equities funds again drove the lion’s share of the outflows, shedding $7.4 billion net.
Citco-administered hedge funds followed July’s overall net outflows of $1.4 billion with a reversal in August, marked by net inflows of $1.6 billion. However, September brought a sizable jump in redemptions, recording net outflows of $12.8 billion. Some strategies did see net inflows during the third quarter, led by hybrid funds with $2.8 billion in net inflows to complete a third straight quarter of net inflows.
Issues for hedge funds during Q3
PivotalPath highlighted several issues for hedge funds during the third quarter. The economic focus shifted to the possibility of a global slowdown and hard landing amid the higher-for-longer interest-rate policies. Due to these concerns, risk-off positioning began to take hold, as evidenced by declines in the major indices during September.
Meanwhile, the 10-year Treasury yield rose from 4.11% to 4.57% in September, while the two-year yield climbed from 4.86% to 5.04%. The economic concerns and higher interest rates led to sweeping declines across some sectors in September. Real estate plunged 8%, followed by biotech’s 7.8% decline and technology’s 6.7% drop.
On a year-to-date basis, the worst-performing sectors are utilities and biotech, down 16% and 12%, respectively. However, technology is still up 32% year to date despite being in the red for the last two months. Consumer discretionary is up 24.6% year to date.
Both firms noted that volatility also spiked during the third quarter, as evidenced by the VIX’s surge from 13.57 in August and 13.63 in July to 17.52 in September.