Hedge Funds Post Strong June Gains From Short Bets but Take Hit From Oil Trades

The majority of hedge fund strategies recorded positive returns in June, driven by astute stock-picking and profitable short positions, although losses related to commodities including oil tempered what could have been a significantly stronger month, according to industry data and investment bank reports. Fundamental equity funds stood out as June’s best performers. According to a client note from Goldman Sachs, stock-picking hedge funds posted an average return of 4.0% for the month, taking their year-to-date return to 17.4%.

With an 18.4% gain, the second quarter was the best since Goldman began tracking the strategy, aided by rising exposure to high-conviction positions, particularly in healthcare stocks, as well as a continuing momentum bias that benefited throughout most of the quarter, masking periods of heightened market volatility.

However, June proved to be a bumpy ride for some. Many hedge funds sustained losses from sharp market reversals in global markets, including sudden price swings in Korean stocks and the impact of short trades moving against managers as markets recovered from prior sell-offs. With an increase in market volatility, managing risk became increasingly important throughout the final weeks of June. Systematic funds, relying on mathematical models to execute trades instead of discretion, posted modest returns.

Systematic hedge funds gained 1.1% in June, for a year-to-date return of 11.3%.

Weakness in major U.S. Technology companies and Chinese equities added to losses by triggering automated trading systems in response to sharp market pullbacks. Commodity trading presented considerable challenges. Oil prices declined sharply from their earlier peaks in the quarter, erasing earlier gains from short positions as tension involving Iran eased.

The fall-off hit hedge funds on the long side of energy trades. Losses on short positions in longer-dated U.S. Treasury bonds contributed to lower returns for June, reflecting a change in expectations for interest rates.

Currency trading results were mixed.

Some global macro and trend-following funds reported gains from positions in the Canadian dollar and Japanese yen, but these were more than outweighed by losses in the Australian dollar, British pound, and Norwegian krone as the foreign exchange markets reacted to shifts in monetary policy assumptions. While challenges were evident in some sectors and strategies, the overall picture remained positive for the hedge fund industry in June. The strength in equity markets, especially semiconductor stocks, allowed active managers to profit, while many hedge funds navigated over-crowded trades that had previously been viewed as unprofitable. The month’s performance underscored the necessity for flexible and adaptable positioning amid the current environment of geopolitical uncertainty, varying interest rate expectations and sectoral rotations.

Looking ahead, investors and fund managers are likely to remain cautious.

Inflation trends, central bank actions, energy prices and ongoing geopolitical tensions continue to present uncertainties and could lead to further volatility in the latter half of the year. Those fund managers that maintain diversified portfolios and fluid trading strategies may find it easier to respond to swiftly evolving market dynamics. The results from June demonstrate both the opportunities and pitfalls confronting professional money managers: while skilled short selling and active stock picking were rewarding, oil price drops and a general weakness in broader commodities underscore that even seasoned funds can be caught off guard by unexpected market shifts.