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Risk assets produced mostly positive performance in July as investors focus shifted towards constructive earnings, strong inflows from both retail and professional communities, as well as a softening in early month factor rotation pressures. The Dow Jones Industrials, S&P500 and the NASDAQ had positive performance. In Equity / Hedged, US Equity Hedged strategies produced mostly positive returns. Technology and biotechnology funds generally outperformed. Conversely, idiosyncratic issues were the primary drivers behind losses reported by some managers. European Equity Hedged incurred losses, driven by FX moves, concentrated trades, industrials and size. Asian Equity Hedged saw gains supported by a weaker Japanese Yen, the announcement of a US / Japan trade deal and the progress on the US / China trade negotiation. In Relative Value / Fixed income gains were driven by US basis and bond RV, although some managers also generated profits from tenor basis and cross currency basis trading. Capital structure and volatility arbitrage strategies produced positive returns. Merger arbitrage and event-driven strategies had a positive performance. There was a measurable increase in activity since the end of Q2 with an improvement in investor sentiment indicators on the corporate side and further positive datapoints around negotiated outcomes with regulators. Agency MBS strategies saw gains, while Quantitative equity strategies had negative performance. In Credit / Income, corporate credit strategies had mixed performance. The corporate long / short sub-strategy was essentially flat while exhibiting a high degree of dispersion in terms of manager returns. Long-biased funds outperformed compared to the low net and net short funds. Asset-backed strategies (ABS) as well as Reinsurance/ILS strategies were generally positive. In Trading, Discretionary trading strategies were mostly negative. Most of the losses were due to G3 receivers and steepeners in the US and EU, with limited offsetting gains from UK steepeners and JGB payers. Systematic trading strategies produced mixed returns. Traditional trend following CTAs reflected a degree of dispersion, attributable to differences in the use of non-trend signals and market weights. More trend-heavy implementations were generally muted to negative, as equity-oriented gains were offset by negative performance in other sectors, most notably in commodities trading.

Overall market commentary

Risk assets produced mostly positive performance in July as investor focus shifted towards constructive earnings, strong inflows from both retail and professional communities, as well as a softening in early month factor rotation pressures. The Dow Jones Industrials, S&P500 and the NASDAQ posted positive performance of 0.08%, 2.47% and 3.70%, respectively. The European indices also generated positive performance with the MSCI Europe, FTSE and DAX producing gains of 0.66%, 3.86% and 0.65%, respectively. Asian developed markets produced positive results with the Nikkei 225 generating a gain of 1.44%, in line with a weaker Japanese Yen and risk-on tailwinds. Emerging market indices produced mixed performance in July. Chinese markets rallied 3.74%, while Brazilian and Indian shares fell 2.65% and 1.33%, respectively. US interest rate markets eased moderately in July, maintaining the recent ranges as investors awaited additional clarity around US Federal Reserve policy direction. The two-year US Treasury yield rose to 3.96% from 3.72%, and the ten-year US Treasury yield increased to 4.38% from 4.23%. Given the fairly muted interest rate climate, the Barclays US Corporate Investment Grade Index inched up 0.07% while the Barclays US Corporate High Yield Index gained 0.45%. Commodity prices were again mixed in July with gold weaker by -0.4%, while oil rallied 8.5%. In currency markets, the Euro fell 3.15% from 1.1787 to 1.1416, while the US dollar gained 8.5% against the Japanese Yen from 144.46 to 150.48.

Source returns: �۶���Ƶ World Market Report. As of July 31, 2025. Historical performance indications and financial market scenarios are not reliable indicators of future performance. 

US Equity Hedged strategies generally produced positive returns in July. Technology and biotechnology funds generally outperformed. Conversely, idiosyncratic issues were the primary drivers behind losses reported by some managers. July was characterized by overall positive equity market performance, despite material intra-month rotations under the surface. During the first half of July, ‘low quality’ and cyclical stocks were in focus due to a generally benign economic backdrop, which supported a broadening of the market rally. The second half of the month saw renewed interest in AI-related stocks following upbeat earnings reports and strong capex guidance. Alpha was highly variable during the month with significant dispersion across the universe. Positive short alpha in the final few days offset weakness stemming from the ‘junk rally’ during the first couple of weeks of July. The technology and utilities sectors typically produced gains, while the healthcare sector was the largest detracting sector. In terms of factors, realized volatility was the leading driver, while quality underperformed given the low-quality rally, which persisted during the month.

European Equity Hedged strategies generally produced negative returns in July. European managers underperformed their peers in the US and Asia where both regions posted positive results. Weakness in results was partly driven by FX moves. Alpha gains achieved from the UK, consumer staples, volatility and idiosyncratic returns were offset by losses incurred from concentrated trades, industrials and size. During the month, Europe-focused fundamental long / short managers’ gross leverage declined and net leverage increased, driven by short covering activities.

Asian Equity Hedged strategies generally produced positive returns in July. The Japanese market was positive, supported by a weaker Japanese Yen and the announcement of a US / Japan trade deal. The Chinese market was also positive on the back of better US / China relationship as there was further progress made on the trade negotiation. Additionally, China announced a number of policies to support the domestic economy and curb ‘unreasonable’ competitions.

HFRI Equity Hedge Total Index:

Fixed income relative value strategies generally produced positive returns in July. The main driver of gains were US basis and bond RV, although some managers also generated profits from tenor basis and cross currency basis trading. Additionally, other managers benefited from directional trades in Japan, yield curve themes, as well as FX exposures, inflation trading and mortgages RV positions.

Capital structure / volatility arbitrage strategies generally produced positive returns in July. Convertible arbitrage benefitted from continued strength in convertible underlying single-name volatility. While the modest move higher in market interest rates posed a slight headwind, spread tightening was beneficial. New issuance hit record levels for the month and was also a positive contributor. Distressed and stressed convertible themes were also accretive to performance. The global convertible bond primary market again surpassed expectations as USD 11.4bn of new issuance priced in July. The US market led deal volumes with approximately UDS 6.1bn in new paper, the most active July since 2003, followed by Asia with USD 3.9bn and Japan with USD 1.4bn. There were no deals coming out of Europe during the month. July performance for equity capital markets strategies was also positive in July. Positive results were notable in widely held IPOs that proved to be well oversubscribed. In general, IPO’s came to market somewhat cheaply, at a fraction of 2021 valuation levels.

Merger arbitrage and event-driven strategies generally produced positive returns in July. The median ongoing merger arbitrage spread finished tighter on a median basis and on a market capitalized weighted basis. The arbitrage spread pool finished the month at approximately USD 13bn, a 50% increase from the prior month-end with the majority of the increase being attributable to the announcement of UNP/NSC. Transactions of note included the USD 163bn in aggregate transaction value including Union Pacific’s USD 85bn acquisition of Norfolk Southern, Palo Alto Networks’ USD 25bn acquisition of CyberArk, and Baker Hughes’ USD 14bn acquisition of Chart. There was a measurable increase in activity since the end of Q2 with an improvement in investor sentiment indicators on the corporate side and further positive datapoints around negotiated outcomes with regulators. On the other hand, managers took notice of the tightening in spreads in recent months.

Agency MBS strategies generally produced positive performance in July. On the long side, investments in agency mortgage derivatives generally performed well as gains were primarily attributable to carry. However, there was some dispersion in terms of OAS movements during the month as spreads for higher coupons widened modestly.

Quantitative equity strategies generally produced negative performance in July. Nearly all managers were challenged, with the most pronounced weakness observed in the US. Geographical diversification provided some cushion, as strategies focused on Asia generally outperformed. The bulk of losses were incurred within equity market neutral strategies, while systematic macro returns were more muted. Most of the weakness was seen in the first of the month with significant recovery towards month-end. Relative to historical norms, the peak-to-trough intra-month losses were amongst the largest for the strategy since the Covid period. Funds with more US equity centric approaches, higher leverage and wider risk constructs underperformed, while more diversified approaches were less impacted, although still negative. Sector-wise, underperformance was widespread. In terms of alpha generation, pressure was largely concentrated on the short side exposures, spreading across forecast horizons and signal categories. Those managers with tighter model constructs proved more resilient, particularly in the first half of the month. The risk unwind across the universe appeared to have been sparked by short covering in small- to mid-cap names. Overall de-grossing by managers was seen to be orderly. As factor volatility amplified and the broader markets rallied, alpha signals, especially mean reversion, got stronger, offsetting some of the risk reduction they would have otherwise experienced. 

HFRI Reltive Value Total Index:

Corporate credit strategies produced mixed performance in July. The corporate long / short sub-strategy was essentially flat while exhibiting a high degree of dispersion in terms of manager returns. Long-biased funds outperformed compared to the low net and net short funds. In addition, there was a notable spread by geography as the European funds generally outperformed compared to the US managers. Within Europe, profits were driven by long investments, which outperformed due to both idiosyncratic factors and the overall outperformance of the European market during the period. In corporate long-biased, the long portfolios drove gains as managers benefited from a combination of positive carry and spread tightening. In addition, investments in high yield and leveraged loans contributed positively to performance.

Asset backed strategies (ABS) generally produced positive performance in July. The majority of managers performed well on the back of stable valuations during the month. Long investments drove performance with carry being the key contributor to performance. Investments in RMBS, agency CRT, SRT, and other income were additive to returns. CLO equity investments generally outperformed compared to other segments of the market.

Reinsurance / ILS strategies generally produced positive returns in July. Gains were mainly a function of accrued coupon income for the cat bond manager and premium accrual for the collateralized reinsurance manager. Additionally, there was a slight augmentation in performance for the cat bond manager as spreads tightened during the month, typical for hurricane season.

HFRI ED: Credit Arbitrage Index