Defined Benefit
Insurance Assets
Nonprofit

Year Ends on a High Note for Hedge Fund Managers After Tough Start

Year Ends on a High Note for Hedge Fund Managers After Tough Start
clock
4 min 29 sec

Risk assets rallied in 4Q22, as U.S. inflation showed a steady decline from the peak over summer, boosting hopes for fewer rate increases heading into 2023. In addition, corporate earnings were generally better than expected and China announced the lifting of its zero-COVID policy. As the quarter wore on, the Federal Reserve remained committed to tighter monetary conditions, signaling more rate hikes in 2023 in addition to the 50 basis point increase at its December meeting. Market volatility returned in December, following downward revisions to 4Q earnings, which reversed some of the earlier gains in the quarter.

Despite the sell-off in December, the S&P 500 gained 8% for the quarter, as equity markets finished on a strong note. U.S. equities rallied in October and peaked in November as a hawkish tone from central banks and signs of a global economic slowdown dampened investor optimism. Value significantly outperformed growth stocks, and stocks across most sectors rebounded, with the energy sector notably higher for the quarter. Global ex-U.S. equities outperformed U.S. equities, as cooling energy prices dragged down inflation, causing U.K. markets to stabilize and European currencies to strengthen against the U.S. dollar. China’s reopening and easing of the zero-COVID policy led to Asian equities recovering their initial losses from October.

Hedge Fund Performance in 4Q22

Hedge funds ended the final quarter on a positive note, as equity hedge managers clawed back some of their negative performance. Those with a focus on real estate, energy, and industrials saw positive gains while growth-focused managers continued to lag. Event-driven strategies had a nice quarter, driven primarily by their event equities that moved higher with the broader markets. Relative value strategies finished out the year on a strong note, as managers continued to benefit from elevated rate volatility levels, the convergence of key relative value relationships, global quantitative tightening, and uncertainty surrounding central bank actions. Macro strategies ended the quarter slightly lower, as losses were taken in short U.S. equities themes, along with short positions in the Chinese renminbi versus the U.S. dollar.

 

hedge fund performance

Serving as a proxy for large, broadly diversified hedge funds with low-beta exposure to equity markets, the median Callan Institutional Hedge Fund Peer Group rose 1.3%. Within this style group of 50 peers, the average rates manager gained 1.2%, as interest rate volatility continued to provide trading opportunities throughout the quarter. Meanwhile, hedged credit managers gained 0.9%, as illiquid credit allocations slightly outperformed liquid credit positions during the quarter. The average equity hedge manager gained 1.5%, as managers that had more of a value bent in their portfolio outperformed those with a growth bias.

Within the HFRI indices, the best-performing strategy last quarter was the emerging market index (+5.1%), as Asian equities rallied in November and December. Equity hedge managers ended the year on a strong note, finishing up 4.0%, as stock selection across energy, mining, travel, and leisure helped performance. Event-driven strategies ended 2.9% higher, as special situation equities moved up with the broader market indices.

hedge fund performance

Across the Callan Hedge FOF Database, the median Absolute Return FOF rose 1.5%, as their allocations to multi-strategy managers put up solid returns on the year. Meanwhile, the median Callan Long-Short Equity FOF increased 2.9%, as managers benefited from an equity rally in October and November. The Callan Core Diversified FOF gained 1.6%, as equity hedge exposure drove performance, offsetting some negative performance from macro managers.

Since the Global Financial Crisis, liquid alternatives to hedge funds have become popular among investors for their attractive risk-adjusted returns that are similarly uncorrelated with traditional stock and bond investments but offered at a lower cost. Much of that interest is focused on rules-based, long-short strategies that isolate known risk premia such as value, momentum, and carry found across the various capital markets. These alternative risk premia are often embedded, to varying degrees, in hedge funds as well as other actively managed investment products.

 

4Q22 MAC Style Group Returns

Within Callan’s database of liquid alternative solutions, the median Long Biased MAC manager generated a gain of 6.9%, as long equity exposure drove performance for the peer group. The Callan Risk Parity MAC index, which typically targets an equally risk-weighted allocation to the major asset classes with leverage, was up 4.4%. The Callan Absolute Return MAC peer returned a positive 2.0%, as a bias toward value equities and credit helped performance on the quarter. The Callan Risk Premia MAC peer rose 1.0%, as equity performance was slightly offset by currency exposure.

Last year was one of the most challenging years for investors in decades. There have been few instances where the combined performance of both equities and fixed income has been so poor. After years of the Fed expanding fiscal and monetary policy, surging inflation required a policy pivot. Global central banks have started on the most aggressive hiking cycles in decades, raising the benchmark policy rates by several percentage points in 2022, with the expectation for more in 2023. While signs pointed to inflation slowing down in 4Q, there has been concern across the market that tight monetary policy is laying the ground for a possible recession in 2023. We suspect this will lead to opportunities across stressed and distressed strategies. Higher volatility across interest rates and currencies should continue to create opportunities in macro strategies. Callan continues to believe that hedge funds can provide downside protection and be an uncorrelated source of return in a diversified portfolio.

Disclosures

The Callan Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to any affiliate firms, or post on internal websites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Private Markets

Hedge Funds Gain in 4Q23 Spurred by Rising Stocks and Bonds

Joe McGuane
An update on 4Q23 hedge fund performance
Private Markets

ILS on Pace for Banner Year in 2023

Sean Lee
Sean Lee discusses the returns for insurance-linked securities (ILS) for the year-to-date.
Private Markets

Most Hedge Fund Strategies End Quarter Slightly Higher

Joe McGuane
Joe McGuane analyzes hedge fund performance in 3Q23.
Operations

What Investors Need to Know About the SEC’s 2023 Private Funds Rules

Alternatives Consulting Group
The Alternatives Consulting Group analyzes the new SEC rules on unregistered private funds.
Private Markets

Hedge Funds Gain but Lag Equity Indices

Joe McGuane
Joe McGuane analyzes hedge fund performance in 2Q23.
Private Markets

Steady Gains for Hedge Funds Amid Volatile Markets

Joe McGuane
Joe McGuane assesses hedge fund and multi-asset class (MAC) performance in 1Q23.
Private Markets

Managers See Declines but Outpace Benchmarks

Joe McGuane
Joe McGuane analyzes hedge fund performance in 3Q22.
Private Markets

Tough Environment Leads to Losses for Hedge Fund Managers

Joe McGuane
Joe McGuane analyzes hedge fund and MAC performance in 2Q22.
Private Markets

Hedge Fund Strategies: A Guide for Institutional Investors

Joe McGuane
Joe McGuane describes the key attributes of hedge funds and how institutional investors should evaluate them.
Private Markets

Market Volatility Tests Hedge Fund Managers

Joe McGuane
Joe McGuane analyzes hedge fund and MAC performance in 1Q22 amid the volatile market environment.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.