What will hedge funds be like in 2024?
November was a strong month for hedge funds, with the best performance since January. The HFRI Fund Weighted Composite Index rose 2.2% for the month, while the HFRI 500 Stock Hedge Index rose 4.3% in November. The latter was the biggest gain since February 2021, according to Hedge Fund Research.
However, the difference in returns was quite large, with the top decile of the composite index rising 12.9%, while the bottom decile recorded an average return of -6.5%. The dispersion is even more stark over the first 11 months, with the top decile up 30.9% while the bottom decile down 16.5%, according to HFR data.
So while November was a good month, there was clearly some significant divergence in returns due to ongoing macroeconomic difficulties. Year to date, the HFRI 500 Stock Hedge Index is up 3.8%. Meanwhile, the index was up 2.6% over the past year through November.
As 2024 approaches, investors may be wondering whether November’s positive momentum will carry over into the new year. The long and short of it is that it all depends on where you look.
long and short
Experts say next year will be a positive year for equity long/short (ELS) hedge funds. Long/short funds are funds that contain long positions in investments that managers believe are good value and will perform well over the long term. The fund also contains short positions, allowing managers to bet against funds they believe are overpriced and likely to underperform. The HFRI EH Long/Short index rose 4.5% in November.
Joseph Marenda, head of hedge fund research and digital asset investments at Cambridge Associates, expects ELS funds to continue to perform well. In his recent hedge fund outlook for 2024, he said that it is highly likely that ELS funds will exceed their long-term average next year. Marenda cited, among other factors, the rise in short-term rebates, which are returns on the collateral with which managers sell securities.
“Rising short-term interest rates have increased short-term rebates to levels not seen since the GFC (global financial crisis),” Marenda wrote in his outlook. “In fact, the fund’s short book generates a higher return than the benchmark stock dividend yield for the first time since 2008. A higher short rebate lowers the cost of shorting and increases the opportunity for a single investment to improve its potential future performance. Name shorts.”
Marenda also said the expected economic downturn could potentially benefit ELS managers by creating more opportunities to buy cheaply and potentially short expensive assets in 2024.
Next year may create an environment favorable to market neutral funds, which are low or no beta ELS funds designed to minimize risk and outperform in bear markets. A recent analysis by Morgan Stanley found that market-neutral strategies have outperformed the broader market in past recessions, including the 2000-2002 market downturn, the 2007-2008 GFC, and the COVID-19 and 2022 bear markets.
Outstanding performance in uncertain times
How the broader market will actually perform in 2024 is yet to be seen. There is a lot of uncertainty about next year, with some economists predicting a recession and most analysts calling for below-average returns from the stock market. Additionally, about 50% of the world’s population will elect their leaders this year, and the results could have a significant impact on the global economy, depending on which direction they take.
However, overall trends suggest that regular ELSS funds and low-risk, market-neutral portfolios may be worthwhile options to consider to beat the market and provide downside protection in a potentially volatile environment.
