Equity Long-Short Strategies Lead Hedge Fund Gains in Q2 2024 Amid Market Shifts

Equity long-short strategies led the pack in terms of performance during the second quarter of 2024, achieving average gains of 2.7%, while global macro managers struggled, according to the latest Hedge Fund Barometer from investment firm and ETF sponsor Unlimited. This report highlights that equity long-short managers maintained typical levels of equity exposure but took notably larger positions in large-cap growth stocks, reducing their exposure to small and mid-cap stocks compared to previous years. This shift marks a significant change from 2022 and 2023, when the focus was on smaller, lower-valued stocks.

Bob Elliott, CEO and CIO of Unlimited, commented on the challenges faced by global macro funds, which struggled to generate returns amidst the volatility in market and economic trends during Q2. Meanwhile, long/short managers benefitted from their increased exposure to tech stocks. Commodity funds maintained heavy short positions in energy but were long on gold, metals, and agricultural commodities, with the potential for a short squeeze in energy should market sentiment turn bullish later in the year.

The Barometer also revealed a modest positive performance for hedge funds across most strategies, with average gross returns across all strategies sitting just below +1.5%. The strongest performer was long/short equity, with a +2.7% gain, while global macro funds were the weakest performers, with an average return of -0.1%.

Hedge funds maintained differing positions in commodities, with long exposures to agricultural products, gold, and metals, while shorting energy. They also bolstered their bullish stance on the US dollar, driven by the relative strength of the US economy, tight Federal Reserve policy, and strong asset performance. However, funds showed caution toward US bonds, influenced by low-term premiums, ongoing supply pressures, and tight monetary conditions.

Additionally, hedge funds reduced their overweight positions in Japanese stocks amid softening domestic growth prospects and the Bank of Japan’s potential tightening. Fixed income managers, on the other hand, continued holding high credit risk levels in corporate spreads, despite these spreads being at historically low levels. The tight spreads may limit their ability to generate substantial returns, even with significant leverage.

Unlimited’s Hedge Fund Barometer, powered by machine learning technology, provides detailed insights into hedge fund positioning across key asset classes, industries, and regions, offering a comprehensive view of how hedge funds are navigating the current market landscape.