Hedge Fund Performance Report – July

Hedge funds delivered a moderate performance in July, rising by 1.2% for the month and 6.4% year-to-date (YTD), as noted in a Thursday report by UBS.

While hedge funds underperformed both equities and bonds, primarily due to challenges in macro and relative value strategies, directional strategies led performance. Most strategies showed positive alpha, benefiting from significantly lower volatility compared to equities and bonds.

July was marked by choppy market conditions, with equities experiencing a 5% drawdown due to concerns over a potential bubble in AI stocks. However, there was a rebound on the last trading day of the month, driven by the Federal Reserve’s indications of imminent rate cuts.

Hedge funds, despite underperforming overall, found pockets of strength in directional equity and event-driven strategies. Managers adopted a cautious stance, de-risking and reducing exposure to beta while awaiting further clarity on geopolitical and fundamental market conditions.

In equity long/short strategies, managers aligned with global equities, although alpha generation posed challenges. According to the report, “Managers significantly de-grossed amid heightened market volatility, selling long winners that had built up significant profit/loss cushions.”

Despite headwinds, certain strategies such as fundamental value and multi-strategy outperformed, whereas technology-oriented managers faced losses due to reversals in crowded positions.

Event-driven strategies outperformed in July, led by gains from activist managers and robust corporate market activity such as buybacks and mergers. Merger arbitrage saw healthy deal completions, while credit arbitrage remained positive but slightly muted by losses in communication services.

Mixed performance was observed in macro strategies; systematic macro managers struggled with fixed-income and currency trades, while discretionary macro managers performed better. Relative value strategies offered stable returns, with credit strategies leading. Convertible arbitrage and structured credit strategies posted gains, although risk levels stayed relatively unchanged compared to previous months.

Looking ahead, UBS maintains a bullish outlook on hedge funds, emphasizing an environment conducive to stock-picking and the potential for easing financial conditions to boost merger and IPO volumes.