In August, financial markets saw high volatility and sharp reversals, largely driven by weak economic data from the United States and increasing concerns about the trajectory of the economy, UBS analysts said.
Against this backdrop, risky assets showed resilience, with global equities up 2.5% and global bonds up 1.1%. Although hedge funds lagged stocks and bonds with a modest gain of 0.3%, they played a vital role in providing stability during the market turbulence.
UBS emphasizes that hedge funds are ideally suited to stabilize portfolios, especially as the US presidential elections approach.
The performance of the hedge fund strategies varied, with equity hedge managers leading the way with monthly gains of 0.7%.
They were closely followed by relative value strategies, which gained 0.6%, and event-driven strategies, which rose 0.4%.
Macro managers, on the other hand, faced challenges and saw an overall decline of 1.5%. Notably, commodity trading advisors suffered the biggest losses at 2.6%, while discretionary macro managers saw a more modest decline of 0.9%.
UBS analysts pointed out that managers with lower market direction outperformed their counterparts with higher beta exposure, reaffirming the benefits of hedge funds’ diverse strategies in tumultuous market conditions.
UBS analysts expect several key factors to drive market dynamics in the coming months, including potential rate cuts by central banks, evolving economic indicators, geopolitical developments and the upcoming US presidential election, which could drive further volatility.
August’s market swings were a reminder of how quickly conditions can change, highlighting the importance of a diversified portfolio to limit the risks associated with traditional investment strategies.
Historically, hedge funds have proven that they can thrive during periods of high volatility, especially around major events such as US elections. UBS analysts argue that this environment presents robust opportunities for hedge funds to exploit market dislocations, ultimately increasing portfolio diversification.
They suggest that investors consider focusing on low-net-worth long/short strategies that can take advantage of market diversification and reduce exposure to potential sell-offs, thereby complementing traditional equity investments.
In addition, UBS advocates diversification within alternative credit strategies, recommending tactical managers capable of dealing with sectoral or regional spreads. These managers can skillfully take net short positions when economic conditions unexpectedly deteriorate.
The current macroeconomic landscape also invites consideration of strategies that promote macroeconomic shifts. Historically, macro funds have been able to effectively navigate varying global cycles and central bank policies, providing strong diversification benefits in turbulent times.
UBS emphasizes that multi-strategy platforms, with their adaptable approaches to shifting investment strategies based on changing market conditions, provide a comprehensive solution for managing risk and seeking returns across different scenarios.
While the potential of hedge funds to provide portfolio stability is significant, UBS analysts caution investors to remain aware of the unique risks associated with investing in hedge funds, including partial illiquidity, leverage, complexity and the wide dispersion of returns among managers .
The August market summary illustrates the challenges hedge funds have faced amid increased volatility and changing sentiment, especially following the Bank of Japan’s rate hike in July and concerns about the US economic recovery.
As global stock markets saw marked swings and geopolitical risks loomed, hedge funds, as tracked by the HFRI Fund Weighted Composite Index, managed to post a monthly gain of 0.3%, up 6.8% since inception of the year. This performance underlines the potential of hedge funds to provide stability in uncertain market conditions.
This month also saw notable success in specific hedge fund strategies. For example, relative value convertible arbitrage managers gained 1% in August, benefiting from market dislocations and volatility, while neutral equity funds rose 0.7%.
As markets look ahead to the US elections and the broader economic landscape, UBS remains optimistic about the role hedge funds can play in stabilizing portfolios and generating strong returns.
In light of changing economic conditions and potential volatility, hedge funds are well positioned to provide the diversification and adaptability investors need to navigate an increasingly complex investment environment.
