Winning hedge fund strategies for 2023
At a time when market calm seems precarious, which alternative strategies should we choose to avoid the storm?
Apparent calm
Looking at the performance of equity indices since the start of the year, the financial markets are in good shape overall. The MSCI World index is up by 13%, the S&P 500 by 15%, the MSCI Europe by 10% and the SMI by 7%. In Asia, the picture is more mixed. Indeed, while the Topix rallied, posting a +23% rise, China was in more difficulty, with the MSCI China index down -6%. Meanwhile, after a complicated year in 2022 marked by a major rise in interest rates, bond indices are in the green. Despite a significant restriction in liquidity conditions, a level of financing costs for governments and companies not seen for 15 years, and a banking crisis that is not all that insignificant, credit spreads have not widened… for the time being.
Long/short equity: a positioning that could pay off
Against this backdrop, which hedge fund strategies have come out on top? While long/short equity managers did a particularly poor job of managing 2022, failing to return to positive territory after their first-quarter decline, in 2023 they once again posted performances more in line with their objectives. After declining by 10% in 2022, the HFRI Equity Hedge index is up by 3% this year, with many managers posting gains of around 6%. The situation is therefore quite different, insofar as the managers have more diversified positions in terms of sector allocation and rather low exposure to the markets overall. This result is all the more interesting given that the US market is driven by a handful of AI-related technology mega-companies, which mask a much more mixed underlying reality. This positioning gives us a little more peace of mind should the equity market lose colour over the summer. Slightly underperforming market indices is the price to pay for not having to worry about having to sell or trying to make up for lost time.
Competition rages among multi-manager platforms
In the search for an alternative to the bond pocket, relative value multi-strategy funds were last year’s big winners. The HFRI sub-index of Relative Value Multi-Strategy funds fell by ‘only’ -1% in 2022 (with a good proportion of managers generating a performance of around +5%) and climbed by +2% over the current year. Demonstrating unfailing robustness, they have achieved a Sharpe ratio that would make the famous 60% equities/40% bonds composite pale into insignificance over the last 3 years. As a result, these platforms have attracted a lot of money and are waging a merciless war for talent, which is not without impact on the fees paid by investors. However, while still positive, this year’s performance has so far fallen short of expectations, probably reflecting a digestion phase. Despite this, the rise in interest rates has meant that medium-term performance expectations have also been revised upwards. It has to be said that this category of managers probably represents the best insurance against exogenous shocks or a sudden rise in volatility. However, it is still necessary to find the smaller funds capable of generating attractive alpha or to gain access to the best platforms, whose investment minimums have risen sharply.
Global Macro: risks that pay off
Although global macro managers were the big stars of 2022 (+9% for the HFRI Macro sub-index), they have suffered since the start of the year (-2%), which is not necessarily a surprise given the massive downturn we have seen. The most striking phenomenon occurred in March with the bank failures in the United States, which caused the US 2-year yield to fall from 5.2% to 3.8% in the space of 48 hours, a movement of a magnitude not seen since 1987. And all the while, the equity market didn’t even raise an eyebrow! In this category, one of the most emblematic managers is probably Chris Rokos, who received a lot of media coverage for his fall of almost 15% in March. But when you take risks, this kind of drawdown cannot be avoided from time to time. Above all, it should be noted that the fund is in the process of returning to positive territory, having generated a return of 51% for its investors last year. In this uncertain market environment, we remain convinced that global macro managers represent a very attractive investment proposition. Among the themes that have caught our attention recently is the possibility of China’s economic stagnation. While everyone is looking up, it may well be looking down that we should be looking at.
To sum up, we believe that it is now appropriate to consider the 3 main categories of hedge fund strategies: equity long/short, multi-strategy relative value and global macro. But the predominant factor in obtaining satisfactory performance from your hedge fund portfolio is selection and access to the best managers. Another variable that is often overlooked is dynamic portfolio management. So, wherever possible, it often pays to take a contrarian approach and not hesitate to take profits when a manager has performed very well and, above all, not be afraid to add money to a manager who has had a blip. If the selection work upstream has been good, that’s what will enable you to make the difference.
Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group