Global hedge funds on track for lowest annual returns since 2008

Hedge funds around the globe are on the track to post their lowest returns since 2008 after asset prices slumped due to the U.S. Federal Reserve’s aggressive monetary tightening cycle.

Investment data company Preqin revealed that hedge fund returns dropped by 6.5 percent this year. Meanwhile, during the financial crisis in 2008, hedge fund returns posted a 13 percent decline.

The net assets of global hedge funds tumbled by 4.8 percent from Q1 to Q3 to reach $4.3 trillion. Within that period, Preqin revealed that the hedge funds saw $109.8 billion in a combined outflow. Data also showed that the total funds launched this year were 915, the lowest in a decade.

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This steep decline, however, was smaller than the plunge in equities and bonds this year. The MSCI World index — which gauges stock performance in numerous countries — posted an 18.7 percent decline. Meanwhile, the ICE BofA U.S. Treasury index — which tracks the U.S. greenback-denominated Treasury bills — also fell by 11.9 percent.

"More than at any time in recent history, both equities and bonds have been very sensitive to macro events, particularly to inflation prints."

Meisan Lim, Hedge Fund Research Managing Director at Cambridge Associates

Cambridge Associates managing director of hedge fund research Meisan Lim said the equity and bond markets were sensitive to macroeconomic changes in 2022, especially related to inflation, more than in other years in recent history.

Certain hedge funds performed better than expected in 2022, by adopting a macro-focused approach in commodities and currencies investment to deal with the current economy. These hedge funds also exploited price differences among related securities.

Hedge Fund Research (HFR) data showed that in November alone, hedge funds that used macro-focused strategies gained 8.2 percent. On the other hand, hedge funds with event-driven and equity-hedged strategies lost 4.7 percent and 9.7 percent, respectively. Activist funds — hedge funds that use minority stakes to stimulate management and strategy changes to gain shareholder value — fell by 13.8 percent as well.

Investment banking company UBS explained that macro strategy was usually not correlated with the movements in the broader stock market, which helped hedge funds diversify their portfolios to minimize risks.

"We think a continuation of tight monetary policy and high volatility should prove favorable for macro managers in 2023,” UBS added in its note.

The inflationary environment in 2022 also accommodated hedge funds that implemented trend-following strategies, according to Janus Henderson Investors head of Asia Andrew Hendry.

Hendry said the strategies worked on an idea that players in the markets processed information at different speeds, meaning that markets that started in one direction would continue to move the same path. The investment manager said the trend-following strategies aligned with a strong performance in the commodity market and weak bonds.

The U.S. central bank used the interest hike method as a way to combat inflation that had not seen a rate this high in decades. The Fed’s decision, however, caused an increased avoidance in risk assets. Wall Street indexes are in line to post their poorest performance since the financial crisis in 2008.

As the largest economy in the world, the Fed’s approach also caused a stir in other economies, many of which are also dealing with high inflation.

Federal Reserve’s action in 2023

Analysts predicted that the Fed would continue its tightening action in 2023. Inflation data showed that several sectors of the economy had slowed down. However, the U.S. labor market remained robust and wage inflation still rose.

Despite the Fed’s efforts to bring down inflation, policymakers still projected that the inflation in Personal Consumption Expenditures (PCE) would stay above the two percent target until at least 2025. The unemployment rate in the U.S. is also expected to increase to 4.6 percent by the end of next year and stays at that rate throughout 2024.