Hedge funds trading equities wrapped June having secured double-digit returns for the year-to-date, aided by tactics that allowed them to manoeuvre through already crowded trades, a Goldman Sachs client note said. The note, seen by Reuters, reported stockpickers returned 4% in June.
Funds that rely on fundamental company analysis recorded particularly strong performance. That cohort posted an 18.4% return for the quarter - the highest quarterly result on Goldman Sachs' records - and a 17.4% gain year-to-date. Goldman attributed the success of these funds to larger, concentrated positions, an emphasis on healthcare sector bets and joining trades that already had momentum.
Not all strategies fared equally, however. Goldman highlighted that volatility during June, trading in a surging South Korean market and some hedge funds being stuck in short bets that assumed asset prices would fall were sources of losses. The month also saw divergent sector and index outcomes: the second quarter was the best on record for the U.S. SOX chip index, while June proved the worst month for the Magnificent Seven stocks. The Roundhill Magnificent Seven ETF fell 9% in June, marking its largest monthly drop in over a year.
Energy markets provided another headwind. Oil prices returned to pre-Iran war levels during the period, and market participants were pricing in at least one Federal Reserve rate-hike by year-end. At the same time, the latest U.S. jobs number tempered traders' expectations for further tightening.
Hedge funds that deploy systematic models to assess market dynamics and generate trades posted a 1.1% gain in June after suffering losses that materialised at the end of the month. For these model-driven strategies, the year-to-date return stood at 11.3%, according to Goldman.
A separate note from Winton, the $18 billion systematic hedge fund which monitors competitor performance, attributed losses for systematic traders to volatile trading in the largest U.S. companies and Chinese firms. Short positioning in fixed income - particularly in long-dated U.S. Treasuries - also detracted from returns for some systematic managers.
Within currency and commodity-related strategies, trend followers and commodity trading advisors earned money on the Canadian dollar and the Japanese yen. But gains were offset by larger losses in the Australian dollar, sterling and the Norwegian krone, wiping out net currency gains for some systematic strategies.
Winton's note also emphasised differences in time horizons across systematic strategies. Many of these approaches impose minimum holding periods for trades; faster strategies, the note said, were better able to navigate the choppier market conditions that emerged in June.
Summary
Equity-focused hedge funds ended June with double-digit year-to-date gains, driven by strong performance from fundamental stockpickers and concentrated, momentum-aligned bets. Systematic strategies and short positions in certain markets reduced some of those month-end gains amid heightened volatility, oil price movements, and shifting rate expectations.
Key points
- Stockpickers returned 4% in June; fundamental-analysis funds posted an 18.4% return for the quarter and 17.4% year-to-date.
- Systematic, model-driven funds gained 1.1% in June and 11.3% year-to-date; Winton (an $18 billion fund) cites volatility in large U.S. and Chinese firms and losses from short fixed-income positions.
- Market moves influencing performance included a 9% drop in the Roundhill Magnificent Seven ETF in June, oil returning to pre-Iran war levels, and a market consensus pricing in at least one Fed rate-hike by year-end.
Risks and uncertainties
- Heightened market volatility can reverse gains quickly and affected systematic and short-position strategies - impacting equity and fixed-income sectors.
- Currency exposure produced mixed results; losses in the Australian dollar, sterling and Norwegian krone offset gains in the Canadian dollar and Japanese yen, creating uncertainty for FX-sensitive strategies.
- Changes in interest-rate expectations, influenced by jobs data, pose risks to Treasury-focused shorts and broader fixed-income strategies.