Weekly Update

Equity hedge leads hedge fund industry gains in May

In May, the HFRI Fund Weighted Composite Index rose 1.3%, led by directional equity hedge and event-driven strategies, with relative value arbitrage gains offsetting macro strategy declines. The HFRI Equity Hedge (Total) Index increased by 2.5%, reversing April's drop and marking its strongest monthly return since February according to Hedge Fund Research. The HFR Cryptocurrency Index surged 13.6%, and the HFR Risk Parity Vol 15 Index jumped 3.0%. Performance dispersion decreased, with the top decile of HFRI FWC constituents rising by an average of 7.6%, while the bottom decile fell by 4.1%, resulting in an 11.7% dispersion, down from 14.3% in April. Over the past 12 months, the top decile gained 42.9%, and the bottom decile declined 7.3%, with a 50.2% dispersion. About 70% of hedge funds saw positive returns in May.

Equity Hedge (EH) funds, particularly in energy and technology sectors, led the gains. The HFRI Equity Hedge (Total) Index rose 2.5%, improving its YTD return to 6.1%. The HFRI EH: Sector-Energy Index and the HFRI EH: Sector-Technology Index increased by 3.6% and 3.2%, respectively. The HFRI EH: Multi-Strategy and Fundamental Value Indices each advanced 3.1%. The HFRI EH: Quantitative Directional Index leads YTD with an 8.6% return.

Event-driven (ED) strategies also advanced, with the HFRI Event-Driven (Total) Index gaining 1.6%, led by the HFRI ED: Multi-Strategy Index at 2.35% and the HFRI ED: Distressed Index at 1.7%. Interest rate-sensitive strategies rose as investors anticipated rate cuts in 2H24. The HFRI Relative Value (Total) Index added 0.6%, raising its YTD return to 3.3%. The HFRI RV: Asset Backed and Convertible Arbitrage Indices each advanced 0.9%. Macro strategies had mixed results, with the HFRI Macro (Total) Index falling by 0.65%, its first decline since November 2023. The HFRI Macro: Systematic Diversified Index dropped 1.3% but remains the top-performing sub-strategy YTD with a 9.15% return. The HFRI Macro: Active Trading Index rose 2.7%, bringing its YTD performance to 6.3%.

Liquid alternative UCITS strategies gained, with the HFRX Global Index up 0.6%, driven by the HFRX Equity Hedge Index (1.25%) and the HFRX Relative Value Index (0.7%). The HFRX Market Directional Index also rose by 1.7%. The HFRI Diversity Index increased by 1.8%, while the HFRI Women Index gained 1.9%. Hedge funds showed strong gains in May, driven by equity and credit strategies, with geopolitical risks emerging as a significant factor for future positioning.

Hedge Funds Increase Bets Against European Government Bonds to Two-Year High

Hedge funds have taken their largest short positions against Eurozone government bonds in over two years, expecting limited further rate cuts from the European Central Bank (ECB) this year. According to The Financial Times, short positions against European government bonds reached $413 billion this week, an 8% increase since January and the highest since April 2022.

This rise preceded the ECB's anticipated 0.25 percentage point rate cut from a historic high of 4%. The ECB also raised its inflation and growth forecasts and removed an easing bias from its policy statement. Robert Tipp of PGIM Fixed Income criticized the ECB for signalling a rate cut despite recent inflation upticks, which rose to 2.6% in May, with services inflation at a seven-month high. The ECB predicts inflation will average 2.5% in 2024 and 2.2% in 2025, maintaining a 1.9% forecast for 2026 against a 2% target.

ECB President Christine Lagarde indicated the rate cut was based on "confidence in the path ahead," without suggesting a shift to easing. Markets are pricing a shallow easing cycle, with a 76% chance of the next cut by September. Short positions on German government bonds have increased by 10% to $112 billion since January, with 10-year Bund yields rising from 2.1% to 2.5%.

The most significant rise in short positions is in Italian bonds, up 38% since January, indicating reduced confidence in Italian debt, which has narrowed its yield spread with German bonds from 1.65 to 1.31 percentage points. Despite this, Bank of America's survey shows asset managers slightly overweight on European bonds. Alex Batten of Columbia Threadneedle Investments prefers US government debt, anticipating prolonged inflation adjustments in Europe similar to the US.

Millennium's $50m man is on the move

Stefan Ericsson is on the move. After leaving Citadel two years ago to join Millennium on a reported $50 million package (according to the New York Times), Ericsson has now joined Taula Capital in London. Taula's founder, Diego Megia, is a former senior portfolio manager at Millennium. Ericsson has taken on a significant role at Taula. Megia serves as the Chief Investment Officer (CIO), with Ericsson as his deputy CIO.

Taula has hired a total of 68 people, including 43 who are not from Millennium. These new hires include professionals from other hedge funds and banks. Taula Capital operates beyond London, with around 26 employees registered with the Financial Conduct Authority (FCA) in the City. The remaining 42 staff members are spread across offices in Jersey, New York, Dubai, Milan, and Switzerland. Unlike Ericsson, most of these employees haven't had a two-year break from the market, likely due to differing non-compete agreements.

Hedge fund Millennium hires an ex-Bloomberg quant to head AI research in FX

Hedge funds are increasingly incorporating AI researchers into their teams, with Millennium being the latest to make a strategic hire. Aaron Key, a PhD nuclear physicist with extensive experience in both fintech and FAANG, has joined Millennium as the head of AI for fixed income technology according to a new eFinancial report.

Although AI can drive cost efficiencies, the acquisition of AI researchers remains a considerable investment. Firms like Balyasny and Two Sigma have been noted for hiring AI experts with salaries surpassing $250k, reflecting the high demand and value of such specialized skills.