Hedge Funds Post Strong June Gains as Short Bets Pay Off, Oil Trades Weigh on Returns

Hedge funds end June with gains but oil losses offset better stock picks Hedge funds wound up June in the green thanks to well-placed short bets and sharp stock selection, though oil prices and other macro bets tamped down performance. The month’s heightened market volatility benefited many active managers by letting them bet on declining shares with short sales while raking in gains from curated long plays, according to data reviewed by Reuters. Stock pickers lead the way Many of the best performers in June were fundamental equity funds.

They reported average returns of 4% last month, boosting their year-to-date gains to 17.4%.

The second quarter’s 18.4% return for the funds was the best quarterly performance since Goldman Sachs began tracking them. Managers profited from strong picks in areas such as healthcare and took advantage of high-conviction stakes that weathered market downturns. Shorts contribute to returns Many hedge funds increased their short exposure in June. By betting on the decline of specific equities-which typically involves borrowing and selling stocks to repurchase them later at lower prices- managers cashed in as certain shares softened in the month, helping to mitigate volatility elsewhere.

The strategy was especially successful during the market’s shifting sectoral preferences and amid updated outlooks for interest rates, company profits, and overall economic growth.

Oil trades sting, however Despite gains on equities, commodity markets provided a painful headwind. Crude oil prices tumbled during June after a surge driven by geopolitical tensions evaporated. Funds positioned for higher prices saw their profits whittled down by the reversal, and energy-related trades proved to be one of the largest drags on hedge funds’ monthly returns.

Funds in black, not in red Some 305 of the top 385 hedge funds gained in June. But even the winning funds had lower returns than those seen last July, the worst month for the asset class since March 2009, with returns averaging 1.4%, below last month’s 1.7%. The gains came in the month following a period in which many hedge fund investors increased withdrawals after a disappointing July, data released Friday showed.

Top-performing fund manager Seth Klarman in May closed his $6.8 billion flagship value fund to new investors following outflows of $5.2 billion.

Systematic managers in the green But the positive June gains did not extend to every sector of hedge fund activity. Systematic and quantitative funds returned just 1.1% during the month, raising their year-to-date performance to 11.3%, hampered by rapidly changing stock movements in the tech and Chinese markets. Currency and bond jitters varied Macro-oriented funds produced a mixed bag from their foreign exchange and fixed-income bets. Some managers made fortunes on currencies such as the Canadian dollar and yen, but these gains were tempered by losses in Australia and other currencies.

Many also struggled in longer-dated U.S.

Treasury bond trades due to changing expectations about interest rates. Outlook for the second half The strong performance in June demonstrates that many hedge funds continue to navigate a period of elevated volatility and constant rotations between different sectors of the market. Still, managers remain on guard entering the back half of 2023, keeping an eye on inflation, central bank policies, earnings expectations, and geopolitics to identify potential market disruptions.

As short-selling and disciplined stock selection propelled the hedge fund industry to a healthy close in June, volatility in commodity markets served as a stark reminder of other macro risks at play. Managers with more diversified strategies and dynamic risk controls will likely have an advantage in the unpredictable months ahead.