Risk assets started off 2024 on a strong note, with U.S. equities experiencing a second consecutive double-digit quarter. Interest rate expectations stayed front-and-center throughout the quarter as lingering inflationary pressures in the U.S. led to a tempering of Fed rate cut expectations for 2024. Positive macroeconomic sentiment was further spurred by corporate earnings, and secular themes such as artificial intelligence (AI) growth and related efficiency gains helped move broad markets higher. The yield on the 10-year Treasury climbed back up to 4.2% by the end of the quarter, as the resumption of the “higher-for-longer” narrative weighed on the bond market.
Hedge funds started the year off on a strong note, as macro strategies produced their strongest quarter in over 20 years.
The S&P 500 rose 11% to start off 2024, as the technology sector was behind this strong move higher, centered around the AI theme. This strong quarter happened despite economic and inflation data that came in stronger than expected, which resulted in a significant reduction in the number of expected rate cuts in 2024 from six to three and the delay of a potential launch of the easing cycle. Communication Services and Technology were the three best sectors for the quarter.
Outside the U.S., Asian, European, and emerging markets were positive. Japanese markets rallied as strong corporate governance initiatives proved to be successful. Within emerging markets, China underperformed its peers amid ongoing concerns over the country’s lackluster economic growth.
1Q24 performance of hedge funds
Macro managers had a great quarter because they were positioned for moderating inflation, interest rate volatility, and an improving economic outlook. Equity hedge strategies also performed well during 1Q, as managers saw performance coming from the Technology, Energy, and Health Care sectors. Event-driven had a positive quarter, as special situations, distressed, and activist positions drove performance. Relative value strategies performed well, as managers profited off interest rate volatility throughout the quarter.
Serving as a proxy for large, broadly diversified hedge funds with low-beta exposure to equity markets, the median manager in the Callan Institutional Hedge Fund Peer Group rose 3.3%. Within this style group of 50 peers, the average hedged credit manager gained 2.5%, driven by interest rate volatility. Meanwhile, the average hedged equity manager added 5.0%. The median Callan Institutional hedged rates manager rose 0.7%.
Within the HFRI Indices, the best-performing strategy was macro, which gained 6.2%, as managers were positioned for moderating inflation, interest rate volatility, and an improving economic outlook. Equity hedge finished up 5.2%. Event-driven strategies were up 2.5%, as managers were able to profit from heightened M&A activity and special situations around companies. Relative value managers closed 2.5% higher.
Across the Callan Hedge FOF database, the median Callan Long-Short Equity FOF ended 5.2% higher, as sector-focused strategies drove performance during the quarter. Meanwhile, the median Callan Core Diversified FOF ended 4.0% higher, as equity and event-driven strategies spurred performance. The Callan Absolute Return FOF ended 2.8% higher, as lower equity beta strategies were behind this move higher.
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.
Within Callan’s database of liquid alternative solutions, the Callan MAC Long Biased manager rose 9.0%, as the broad-based equity rally moved performance higher. The Callan MAC Risk Parity peer group rose 8.7%, as equities and fixed income drove performance. The Callan MAC Absolute Return peer group rose, as broad markets had a strong end of the year.
2024 will continue to present a complex and potentially rewarding landscape for hedge funds. Overall, Callan remains constructive in 2024. Hedge funds have the ability to provide diversification across institutional portfolios. To do that, managers will have to navigate a confluence of macroeconomic, geopolitical, and fundamental crosscurrents to be successful investors over this next year.
Disclosures
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