Hedge Funds Are Positioned to Continue Their Strong Run

Equity and multistrategy funds delivered the highest gains in the first quarter, according to Citco.

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Hedge funds proved their ability to protect investors during the market downturn in 2022, losing only 4.2 percent while the S&P 500 was down 20 percent. Now, they are expected to sustain that strong performance as market dispersion continues to increase.

In the first quarter of 2023, hedge funds gained an average of 4.5 percent, according to hedge fund administrator Citco. Although this gain was lower than the 7 percent gain in the S&P 500 index over the same period, it signaled a continued upward trend in the hedge fund industry, according to the Citco’s latest report. Hedge funds had generated an average weighted return of 4.1 percent in the fourth quarter of 2022, up from -0.6 percent in the third quarter and -6.8 percent in the quarter before, according to Citco’s data.

In the first three months of 2023, multi-strategy and equity hedge funds were the best performers, returning 5.8 percent and 5.4 percent, respectively, according to the report. They were followed by event-driven strategies (4.7 percent) and fixed-income arbitrage (3.2 percent). Global macro and commodities were the only two strategies that recorded losses in the first quarter, falling by 1.1 percent and 2.2 percent, respectively.

Size was another factor in first-quarter performance, with bigger funds continuing to outshine their smaller peers, according to the Citco report. From January to March, funds with over $3 billion in assets returned an average of 6.4 percent. In comparison, funds with $1 billion to $3 billion in assets gained 2.7 percent, while those with $500 million to $1 billion in assets returned 3.4 percent. The smallest group of funds, which manage no more than $200 million in assets, gained merely 0.8 percent in the first quarter.

While the positive returns generated by hedge funds has come amid an upswing in the broader market, it has also come at a time when the gap between the best and worst performing stocks is getting bigger, according to Zhe Shen, director of diversifying strategies at TIFF Investment Management. Dispersion in the S&P 500 index rose from 23 percent in February to 31 percent in March, according to S&P Dow Jones Indices. Equity-focused hedge funds generally benefit from widening market dispersion because they can make money by taking either long or short positions, Shen said.


“I do believe hedge funds can outperform the market going forward,” Shen told II in an interview. In addition to the favorable conditions for stock pickers, Shen said high-yield credit strategies, will benefit from surging interest rates and rising economic volatility. While he isn’t ready to take outsized positions in any specific strategy, he said he has reduced TIFF’s exposure to trend-following strategies because he doesn’t believe their strong performance last year will carry into 2023.