Key Observations
- A lackluster showing from hedge funds in 2023 was driven largely by an underweight to mega-cap U.S. stocks. However, despite mega-cap outperformance in 2024, hedge funds are off to a compelling start.
- Higher interest rates may help hedge funds with significant short positions in their portfolios. Short rebate, a measure of how a hedge fund earns on collateral it posts to short stocks vs. what they owe to the short lender through dividends, has turned positive for the first time since 2008. While higher interest rates may drive additional opportunities and a tailwind for cash-efficient hedge fund strategies, they also come with heightened return expectations.
- We believe European High Yield offers a compelling opportunity based on structural inefficiencies and higher current yields in today’s market.
Out the Gate Running
After a strong performance in 2022, hedge funds entered 2023 very defensive on concerns around ongoing inflation and the possibility of a recession. In aggregate, hedge funds were considerably underweight the Magnificent 7 which returned an impressive 76% in 2023 while the rest of the S&P 500 returned just 8%. As a result, many hedge funds faced challenges in a market primarily driven by mega-cap stocks and AI-driven narratives. Strategies with embedded equity exposure, such as the HFRI Equity Hedge (+11.4%) and HFRI Event Driven (+10.4%), faired relatively well in 2023. HFRI Macro struggled to perform, finishing the year in negative territory at -0.3%.
