Hedge funds gained in December to conclude a volatile year, navigating election and geopolitical risks, falling but persistent inflation, and surging cryptocurrency prices, according to HFR.
Strategy-level performance was mixed in December following the November surge, as managers and investors continued to position for an active M&A cycle and more business- friendly policies from the incoming US Presidential administration, while also anticipating continued inflationary pressure and fewer rate cuts from the US Federal Reserve than some investors had expected, the firm says.
New hedge fund launches rose while liquidations declined sharply heading into 4Q24, as investors positioned for an evolution of the geopolitical and economic risks which had defined 2024. The estimated number of new funds launched in 3Q24 increased to 118, up slightly from the prior quarter estimated launch total of 111, while liquidations in 3Q posted a sharp decline to only an estimated 82 closures, the lowest quarterly liquidation total since 2Q06 according to the latest HFR Market Microstructure Report, released by HFR. As previously reported by HFR, total hedge fund industry capital reached another record level heading into 4Q, beginning the quarter at an estimated USD4.46 trillion.
New fund launches continue to exhibit industry strength and investor demand, with the estimated YTD total of 375 launches over the first three quarters of 2024 topping same period year over year. Liquidations also fell over the same period last year, with 326 funds closing, below the estimated 311 liquidations over same period last year.
The HFRI Asset Weighted Composite Index gained +0.8 per cent in December while the HFRI Fund Weighted Composite Index (FWC) declined -0.2 per cent for the month, according to data released today by HFR. Strategy gains were led by uncorrelated Macro and Relative Value Arbitrage strategies, while directional Equity Hedge and Event Driven exposures declined, with each of these paring strong annual gains and the strongest single monthly return for 2024 in November.
The HFR Cryptocurrency Index fell -2.4 per cent in December after gaining +35.7 per cent in November on the favourable outlook for cryptocurrency by the incoming Trump administration, ending the volatile year with a +59.8 per cent return. The recently launched HFRI Multi-Manager/Pod Shop Index was essentially flat for December, adding +0.01 per cent for the month as managers navigated a pullback from strong election-related gains in November. Multi-manager funds continued to position for the policies of the incoming administration across all sectors including energy, import, technology, and financials.
Hedge fund performance dispersion tightened in December, as the top decile of the HFRI FWC constituents advanced by an average of +5.5 per cent, while the bottom decile fell by an average of -7.4 per cent, representing a top/bottom dispersion of 12.9 percent for the month. By comparison, the top/bottom performance dispersion in November was 17.7 per cent. For the full year 2024, the top decile of FWC constituents gained an estimated +37.3 per cent, while the bottom decile declined -11.7 per cent, representing a top/bottom dispersion of 49.0 per cent. Approximately 45 per cent of hedge funds produced positive performance in December.
Uncorrelated Macro strategies led performance in December, as equities and bonds declined on expectations for fewer rate cuts by the US Federal Reserve in 2025. The HFRI Macro Asset Weighted Index advanced an estimated +1.6 per cent in December, while the HFRI Macro (Total) Index gained +1.1 per cent. Macro sub-strategy gains were led by the HFRI Macro: Commodity Index, which jumped +3.6 per cent, and the HFRI Macro: Systematic Diversified/CTA Index, which gained +1.2 per cent for the month. For the full year 2024, the HFRI Macro Index was the lowest performing main strategy index, gaining +5.95 per cent, with Macro sub-strategy gains led by the HFRI Macro: Multi-Strategy Index, which advanced +7.7 per cent for 2024.
Fixed income-based, interest rate-sensitive strategies produced another steady gain despite rising bond yields in December with the HFRI Relative Value (Total) Index gaining an estimated +0.2 per cent for the month to notch its 14th consecutive monthly gain and 27th gain in last 30 months. RVA strategy performance was led by the HFRI RV: Asset Backed Index, which advanced +0.55 per cent for the month, followed closely by the HFRI RV: Volatility Index, which added +0.49 per cent. For the year, the HFRI RV: Yield Alternatives Index led RVA sub-strategies with a return of +11.3 percent in 2024.
Equity Hedge (EH) funds, which invest long and short across specialised sub-strategies, pared industry leading performance gains in December despite topping equity market declines, with the HFRI Equity Hedge (Total) Index falling an estimated -0.7 per cent for the month to bring the FY 2024 return to +12.3 per cent, which led all main strategy indices for the year. EH sub-strategy performance was led by the HFRI EH: Technology Index in December, surging +2.7 per cent for the month, while the HFRI EH: Equity Market Neutral Index added +0.5 per cent. For the full year 2024, EH sub-strategy performance was led by the HFRI EH: Technology Index which surged +19.6 per cent.
Event-Driven (ED) strategies, which often focus on out-of-favour, deep value equity exposures and speculation on M&A situations, declined in December despite continued expectations for a strong M&A cycle into 2025. The HFRI Event-Driven (Total) Index fell an estimated -1.3 per cent for the month, paring the strong annual gain to +8.7 per cent. ED sub-strategy declines were led by the HFRI ED: Activist Index, which fell -4.6 per cent for the month, while the HFRI ED: Special Situations Index declined -1.5 per cent in December. For the full year 2024, ED sub-strategy performance was led by the HFRI ED: Multi-Strategy Index, which jumped +12.6 per cent.
Liquid Alternative UCITS strategies posted a narrow gain for December, with the HFRX Absolute Return Index gaining +0.08 per cent while the HFRX Global Hedge Fund Index added +0.01 per cent for the month. Strategy gains were led by the HFRX Event Driven Index, which gained +0.48 per cent in December, while for the full year 2024, HFRX performance was led by the HFRX Equity Hedge Index, which gained +7.83 per cent.
Industry-wide fees declined slightly into 4Q24, as the average management fell one basis point from the prior quarter to an estimated 1.34 per cent, while the average incentive fee fell to 15.92 per cent, a decline of five basis points over the quarter.
“Hedge funds gained to conclude a volatile and uncertain 2024n, navigating a very different market environment than the election euphoric, risk-on sentiment that dominated November, as equities declined and bond yields rose, and as persistent inflationary pressures tempered expectations for US Federal Reserve rate cuts in 2025. Hedge fund performance was led by uncorrelated Macro & fixed income-based Relative Value Arbitrage strategies, underscoring the defensive outperformance of equity market declines and the benefits of strategy diversification,” says Kenneth J. Heinz, President of HFR. “New fund launches increased while liquidations experienced a steep drop entering 4Q24, as record industry capital positioned for significant policy changes regarding trade, tariffs, regulatory oversight, and immigration. Institutions are likely to increase allocations to hedge funds which have demonstrated their strategy’s robustness through the volatile 2024 and which are tactically positioned for the diverse and unpredictable impacts of rapidly evolving policy changes in 2025.”
