Hedge Funds Protected Wealth In Q1 But Lagged The Market In March

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The hedge fund performance numbers for March and the first quarter are finally in. Data from With Intelligence shows that hedge funds generally protected wealth during the first quarter. However, while they broadly outperformed stocks in January and February, hedge funds could not stand up to the March rally in the stock market.

NEW YORK, NEW YORK – APRIL 12: Traders work on the floor of the New York Stock Exchange during … [+] morning trading on April 12, 2022 in New York City. Data released this morning showed that inflation rose 8.5 percent in March, the highest annual increase since December 1981, amid energy prices soaring due to Russia’s war in Ukraine. (Photo by Michael M. Santiago/Getty Images)

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March hedge fund performance

The Eurekahedge Hedge Fund Index from With Intelligence returned 1.35% in March, underperforming the S&P 500’s 3.58% return. The markets have been dealing with the broad sanctions on Russia imposed by the U.S. and its allies in connection with its invasion of Ukraine. Concerns about stagflation started to grow as the Federal Reserve shifted to a more hawkish stance as it tried to combat inflation.

The U.S. Consumer Price Index jumped 8.5% in March, marking the largest year-over-year increase since December 1981. The Fed hiked interest rates by 25 basis points in March, attempting to rein in inflation as at least six more rate hikes are expected this year.

Latin America led all other geographies in March with a 3.59% return, while Asia, excluding Japan, brought up the rear with a loss of 1.4%. Among strategies, CTA/ managed futures funds posted the best performance at 4.59%, while arbitrage was the worst-performing strategy at -1.16%.

Preliminary flows data suggests hedge funds racked up $19 billion in performance-driven gains in March, although $2.6 billion in outflows partially offset that. The global hedge fund industry had $2.4 trillion in assets under management as of the end of March.

First-quarter flow numbers

Looking at the first quarter as a whole, With Intelligence reports that hedge funds were roughly flat, protecting wealth as the stock market tumbled, as represented by the -4.9% return for large-cap U.S. stocks. The firm reports that hedge funds lost 1.3% in January and 0.3% in February but flipped into the green for March with a return of 1.4%.

Although investors pulled money from hedge funds in March, With Intelligence reports that they added to their hedge funds overall during the first quarter, with inflows amounting to $11.2 billion in the first three months of the year.

The firm adds that $8.5 billion of those inflows went to macro funds, while $4.3 billion went into managed futures funds. According to Eurekahedge data, the hedge fund industry has recorded $10.8 billion in performance-based losses and $18.3 billion in investor redemptions for the first three months of the year.

Returns by strategy for Q1

As far as strategies, CTA/ managed futures funds are leading the way year to date with a return of 6.84%, followed by macro funds, which are up 2.52%.

However, there is a discrepancy in the data as With Intelligence shows a return of 7.8% for managed futures funds in the first quarter. According to Eurekahedge, fixed income, arbitrage and long/ short equity funds are at the bottom of the heap on a year-to-date basis with returns of -1.89%, -2.68% and -3.58%, respectively.

Data from With Intelligence agrees with Eurekahedge on the top and bottom hedge fund strategies, with managed futures and macro funds at the top, the only two strategies with meaningfully positive returns.

However, the return numbers were different even though Eurekahedge is owned by With Intelligence, demonstrating just how widely the data differs by firm. Different hedge funds report to different firms, so to get a more concrete picture of how hedge funds are doing, it helps to review data from multiple sources.

According to With Intelligence, multi-strategy and event-driven funds were essentially flat for the first quarter, while relative value and arbitrage, fixed-income and credit, funds of funds, and long/ short equity funds were all in the red. Long/ short equity was the worst-performing strategy with a -3.5% return, while funds of funds were the second-worst strategy at -2.3%.

Consequences of the war in Ukraine

The best return among hedge funds with at least $50 million in assets was 59.8% for the first quarter. The best-performing macro fund, the Haidar Jupiter Fund, returned 149% in the first quarter. Fifty-five percent of funds with more than $1 billion in assets have posted a positive return year to date.

The first quarter has been marked by continued, worsening inflation and significant geopolitical risks, both of which have impacted market performance. It was no surprise that managed futures, and macro hedge funds benefited the most from the volatility triggered by the war in Ukraine.

The economic and political consequences of the Russian invasion upset the market’s bullish expectations for economic recovery and central bank policies. The firm added that those consequences also sent reversals and dislocations sweeping through the market.

According to With Intelligence, the war in Ukraine will cause a secondary and collateral impact on national economies and companies for years to come.

Michelle Jones contributed to this report.