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Market and hedge fund update in a nutshell

Risk assets produced mostly positive performance in June as investors demonstrated renewed focus on AI related themes, the easing of Middle East tension, as well as some market short covering across momentum factors. Expectations for a more dovish US Federal Reserve also provided a boost to market sentiment. The Dow Jones Industrials, S&P500 and the NASDAQ had positive performance. In Equity / Hedged, US Equity Hedged strategies generally produced positive returns. All market sectors, except for consumer staples and utilities, featured positive performance during the month as investors rotated out of defensive stocks. European Equity Hedged achieved gains from exposure to the UK region, as well as sector and factor allocations information technology, size, momentum and concentrated positions. Asian Equity Hedged saw gains driven by improved US-China relations as progress was made in trade negotiations and in Japan attention focused on the upcoming upper house election and its impact on tariff negotiation with the US. In Relative Value / Fixed income gains were driven by US basis and bond relative value themes, while some managers produced additional gains from European asset swap trading. Capital structure and volatility arbitrage strategies saw mixed outcomes. Merger arbitrage and event-driven strategies were generally positive, where year-over-year activity indicated a reversal in the recent trend in M&A volume trend. Agency MBS strategies saw gains, while Quantitative equity strategies had a mixed performance. In Credit / Income, corporate credit strategies had a mixed performance. Profits were driven by long investments in US and European high yield bonds. Investment grade investments were also profitable, while alpha shorts and index hedges detracted from performance. Asset-backed strategies (ABS) as well as Reinsurance/ILS strategies were mostly positive. In Trading, Discretionary trading strategies were mostly positive. Performance drivers included interest rate themes from US and UK receivers, coupled with G3 steepeners. Systematic trading strategies were generally positive, with trend following CTAs supported by profitable trends in currencies and stock indices, which outweighed losses from the reversals in energy markets.

Overall market commentary

Risk assets produced mostly positive performance in June as investors demonstrated renewed focus on AI related themes, the easing of Middle East tension, as well as some market short covering across momentum factors. Expectations for a more dovish US Federal Reserve also provided a boost to market sentiment. The Dow Jones Industrials, S&P500 and the NASDAQ posted positive performance of 4.32%, 4.96% and 6.57%, respectively. The European indices, MSCI Europe, DAX and FTSE, generated mixed performance with the MSCI Europe and DAX producing losses in June of -1.40% and -0.37%, respectively. The FTSE All Share Index gained 0.28%. Asian developed markets produced positive results with the Nikkei 225 generating a gain of 6.64%, in line with the strong risk-on climate and stable Japanese Yen. Emerging market indices produced broadly positive performance in June. Chinese, Indian and Brazilian markets rallied 2.90%, 2.65% and 1.33%%, respectively, in line with the easing of trade tensions. US interest rate markets strengthened in June as investors pivoted back toward hopes for lower US rates given the ongoing tariff pause. The two-year US Treasury yield fell to 3.72% from 3.90%, while the ten-year US Treasury yield decreased to 4.23% from 4.40%. Given lower US Treasury yields and the positive risk climate, the Barclays US Corporate Investment Grade Index rallied 1.87% and the Barclays US Corporate High Yield Index gained 1.84%. Commodity prices were mixed in June with gold weaker by -0.2% while oil rallied 8.9%. In currency markets, the Euro rose 3.88% from 1.1347 to 1.1787, while the US dollar inched up 0.12% against the Japanese Yen from 144.28 to 144.46.

Source returns: �۶���Ƶ World Market Report

US Equity Hedged strategies generally produced positive returns in June. Most managers posted positive results for the month, with the downside outliers typically being managers that had idiosyncratic issues, most notably in the healthcare and energy sectors. ‘Realized volatility’ was the leading factor driver amid the risk-on tape, while “quality” was the primary laggard. The market’s focus on technology and AI contributed to the underperformance of the “value” and “dividend yield” factors. It was a positive alpha month driven mostly by the long portfolio, with the short side risk generally experiencing alpha headwinds. All market sectors, except for consumer staples and utilities, featured positive performance during the month as investors rotated out of defensive stocks. Technology stocks were the top performers as sentiment continued to grow regarding the rate of progress in AI development and expectations of additional corporate spending.

European Equity Hedged strategies generally produced positive returns in June. Alpha gains were achieved from exposure to the UK region, as well as sector and factor allocations in information technology, size, momentum, and concentrated positions. These gains were partially offset by losses from idiosyncratic returns. European-focused managers typically underperformed their regional counterparts in June, as US-focused managers’ performance were driven by the market’s focus on AI and technology. Across the industry, European fundamental managers reduced their gross exposure through the month by 12.9% to 186.6%, its 74th percentile on a three-year basis. Overall, net exposures decreased by -1.6% to 55.7%.

Asian Equity Hedged strategies generally produced positive returns in June. Positions in China, the US and Japan were additive to performance. In Japan, markets were positive, with attention focused on the upcoming upper house election and its impact on tariff negotiation with the US. The Nikkei index significantly outperformed the TOPIX 500 index, which was partly driven by foreign investors increasing their positions in Japan. The China market was also largely positive, benefiting from improved US-China relations as progress was made in trade negotiations. The US lifted some restrictions on exports to China, while China eased rare earth export control. The increase in ECM activities also boosted investor sentiment in the Chinese market.

HFRI Equity Hedge Total Index:

Fixed income relative value strategies generally produced positive returns in June. Gains were mostly generated from US basis and bond relative value themes, while some managers produced additional gains from European asset swap trading. Other regions experienced more muted results across both micro and macro RV exposure.

Capital structure / volatility arbitrage strategies generated mixed returns in June. Returns were noticeably soft, particularly for convertible arbitrage funds where performance for most managers were muted or modestly negative. A second consecutive month of strong new issuance pressured valuations, including several issuers who tapped the market on an opportunistic basis, either for general corporate purposes or for the first time via convertible capital raises. The newer issuance that came to market were generally at issuer friendly terms. There were also several issuers that experienced events impacting their perceived credit quality. One issuer was a relatively large sized company in the healthcare sector, while several others in the renewable space were influenced by tax credit changes embedded in the reconciliation bill. Overall, capital structure RV trades continued to underperform, largely from the short side due to tightening in credit conditions.

Merger arbitrage and event-driven strategies generally produced positive returns in June. Year-over-year activity indicated a reversal in the recent trend in M&A volume, driven by the direction of trade disputes, a more normalized level for the VIX, equity markets returning toward all-time highs, and secular disruptive market forces necessitating consolidation within many industries. Additionally, there is evidence that the regulatory backdrop has improved.

Agency MBS strategies generally produced positive performance in June. While aggregate sub-strategy performance was positive, there was some dispersion across manager results. Long biased investments drove profits during the month. Managers benefited from positive carry and modest spread tightening in mortgage derivatives. Funds with long biases to duration and/or the mortgage basis outperformed.

Quantitative equity strategies generated mixed performance in June. Weakness was experienced across both the market neutral cohort and systematic long / short managers. Results were largely a function of negative beta. Other managers were able to achieve positive performance despite the negative long / short spread. From a factor perspective, asset selection, short crowdedness, volatility, and consumer discretionary were among the largest alpha detractors to systematic long / short returns in June. This was partially offset by gains from short-term momentum factors, concentration, medium-term momentum, staples and information technology.

HFRI Reltive Value Total Index:

Corporate credit strategies produced mixed performance in June. While the weighted-average return was negative, most funds were either flat or positive during the month. Profits were driven by long investments in US and European high yield bonds. Investment grade investments were also profitable. Conversely, alpha shorts and index hedges detracted from performance. Managers with lower net exposure underperformed compared to those funds that were positioned in a net long manner. The corporate long-biased sub-strategy was broadly positive in June. Managers generally benefited from favorable tailwinds as high yield bonds and leveraged loans produced positive returns during the month. Gains were driven by long investments with results attributable to a combination of carry and spread tightening. Those managers who outperformed were distressed-focused funds that produced idiosyncratic gains in June.

Asset backed strategies (ABS) generally produced positive performance in June. All funds produced positive returns during the month. Gains were driven by long investments as most managers produced a combination of positive carry and mark-to-market gains. At the sector level, investments in RMBS, SRT and European non-performing loans were the notable contributors. Select investments in CLO equity and CRE underperformed compared to other asset classes.

Reinsurance / ILS strategies generally produced positive returns in June. Results for managers were mainly a function of carry; accrued coupon income for the catastrophe bond manager and premium accrual for the collateralized reinsurance manager. However, there was a slight augmentation in performance for the catastrophe bond manager as spreads tightened during the month, which is typical at this time of the year now that we have entered the hurricane season. The collateralized reinsurance manager also benefited from a slight markup in a contract that took a loss last year.

HFRI ED: Credit Arbitrage Index