Hedge Fund Performance Surged Through the Second Quarter, but Investors Are Nervous about the Economic Effect of the Delta Variant

The largest funds — those with over $3 billion in assets — delivered the best returns, according to a Citco analysis.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

After strong hedge fund performance in the latter half of 2020 and the first quarter of 2021, investors and managers alike held their breath for the second quarter numbers.

In what looks to be an upward trend, the second quarter of 2021 marked another strong one for hedge funds, according to Citco Fund Services’ quarterly hedge fund report released on Tuesday. In fact, in the second quarter of 2021, 82 percent of hedge funds delivered a positive annual return — an approximately nine-percentage-point increase from the first quarter, according to the analysis of Citco-administered funds.

What’s more, in the second quarter of 2021, the larger the fund, the better the performance. Based on Citco data, the largest funds — those with over $3 billion in assets under administration — saw the best weighted average returns of 7.7 percent. These large funds had a median return of 6.55 percent. Funds with between $500 million and $1 billion in assets had a weighted average return of 5.12 percent and a median return of 3.41 percent.

Still, investors are wary, given the swift rise of the Delta Covid-19 variant. Indeed, July numbers show a slowdown.

According to hedge fund research and data analytics firm PivotalPath, its Equity Sector Index, which includes several big sub-strategies, had a difficult July. For one, healthcare was down 3.3 percent, which represented the largest sub-strategy loss. Within Healthcare, biotech funds suffered even larger losses after interest rate concerns, fears over product pricing, and a huge slowdown in mergers & acquisitions.


The consumer sector was especially hard hit. “In addition, there was a big gap between companies that benefitted from Covid-19 restrictions and those that suffered from the pandemic. The firm’s so-called Social Distance Losers Basket lost 9.5 percent in July compared to a gain of 5.1 percent for PivotalPath’s Social Distance Winners basket.

In the second quarter report from Citco, researchers broke down fund performance by strategy: Commodities saw the strongest performance with a weighted average return of 8.3 percent followed by multi-strategy and equities. Global macro strategy saw the worst performance, generating a 1.3 percent weighted average return.

Overall, author Declan Quilligan, Citco’s head of hedge fund services, repeatedly refers to the second quarter as “strong,” flagging funds’ overall weighted average return of 6 percent.

Citco-administered funds saw “solid net inflows” in the second quarter as well, with gross subscriptions reaching $50.5 billion. After redemptions of $41.8 billion, hedge funds had net inflows of $8.7 billion in total.

As for trade volumes, numbers are still on a downward trend that was seen in the first quarter of 2021. But, Quilligan noted that June volumes were 9 percent higher than volumes in the second half of 2020.

“As we look back at the trends over the last 18 months, the strong correlation of volumes to market volatility remains,” according to the report.

As a result, equity and equity swaps remain the most popular products for managers. According to the report, equity swaps in June 2021 were up 44 percent from June 2020.