Hedge funds navigated a historic surge in volatility at the start of August as large-cap equities saw steep declines in the first three days of the month, according to hedge fund analyst firm HFR’s data. However, most indices rebounded to conclude August with modest gains. The HFRI Fund Weighted Composite Index advanced +0.25% for the month, driven by strong performance in equity hedge and fixed income-based relative value arbitrage strategies, according to the data.

The newly launched HFRI Multi-Manager/Pod Shop Index led the way, rising +1.6% in August. This gain was attributed to a combination of equity and fixed income trading amid early-month volatility. The index includes funds employing a multi-manager/pod structure, where capital is allocated to independent investment teams (pods) that operate under portfolio management guidelines. HFR estimated that approximately $425 billion is managed within multi-manager funds.

Equity Hedge Funds Rise Above

Equity hedge funds performed particularly well in August, driven by healthcare and technology sub-strategies. The HFRI Equity Hedge (total) Index rose an estimated +0.8%, bringing its year-to-date (YTD) return to +9.0%. Leading sub-strategies included the HFRI EH: Healthcare Index, up +2.85%, and the HFRI EH: Technology Index, which gained +2.2%. The Healthcare Index was the top performer YTD with a return of +16.45%.

Fixed Income Strategies Post Gains

Fixed income-based relative value strategies also posted gains in August, with the HFRI Relative Value (total) Index rising +0.4%. Notable sub-strategy performers included the HFRI RV: Convertible Arbitrage Index, up +1.1%, and the HFRI RV: Corporate Index, which added +0.7%.

Macro Strategies Continue to Decline

In contrast, Macro strategies experienced declines for the fourth consecutive month, as the HFRI Macro (total) Index fell -1.1% in August, led by losses in quantitative, trend-following commodity trading adviser strategies. However, the HFRI Macro: Active Trading Index surged +4.7%, offsetting some of these losses.

Event-Driven Strategies Deliver Mixed Results

Event-driven strategies delivered mixed results, with the HFRI Event-Driven (total) Index posting a modest gain of +0.15%. The HFRI ED: Activist Index led sub-strategies with a +1.2% increase, while Special Situations rose +0.6%.

Multi-Manager Funds Emerge as Leaders

Kenneth J. Heinz, president of HFR, remarked, “Leading strategy areas were opportunistically positioned for the volatility, driven by a combination of technology stock weakness and unwind of the Japanese Yen carry trade, with these factors also driving mixed performance across a wide range of hedge fund sub-strategies. Multi-Manager Pod Shop hedge funds were among the leading areas of hedge fund performance, with these able to tactically adjust portfolio exposures through the volatility and weakness to drive gains for the month. With expectations of volatility and the potential for destabilizing dislocations remaining high through year-end, institutions which are interested in specialized, opportunistic access to these powerful trends are likely to allocate to managers which have demonstrated their strategy’s superior performance and robustness in recent months.”

The Rise of Multi-Manager Funds

The HFRI Multi-Manager/Pod Shop Index, launched by HFR, tracks the performance of funds that employ a multi-manager/pod structure. These funds allocate capital to independent investment teams (pods) that operate under portfolio management guidelines. The index rose 1.6% in August, driven by a combination of equity and fixed income trading through the historic early August volatility spike. HFR estimates that approximately $425 billion is currently managed in multi-manager funds. These funds are becoming increasingly popular with institutional investors who are seeking specialized, opportunistic access to powerful trends in the market.

Performance Dispersion Contracts

Performance dispersion contracted in August, as the top decile of the HFRI FWC constituents advanced by an average of +5.5%, while the bottom decile fell by an average of -6.2%, representing a top/bottom dispersion of 11.7%. This is down from 14.6% in July and 47.2% in the trailing 12 months ending August 2024. Approximately 60% of hedge funds produced positive performance in August, HFR says.

Navigating the Volatility

The performance of hedge funds in August demonstrates the importance of having a diversified portfolio and a strategy that can adapt to changing market conditions. While some strategies struggled, others thrived, highlighting the importance of picking the right managers and understanding the potential risks and rewards of different investment approaches. As volatility is expected to remain high through year-end, investors should carefully consider their investment objectives and risk tolerance before allocating capital to hedge funds. The rise of multi-manager funds, with their ability to diversify and adapt, suggests that this type of investment approach could become increasingly popular with investors seeking to navigate the choppy waters of the market.

What's Next for Hedge Funds?

The future of hedge funds is likely to be shaped by a number of factors, including the continued volatility of the market, the increasing popularity of alternative investments, and the ongoing pressure on fees. As investors continue to search for ways to enhance their returns and manage risk, hedge funds will need to continue to adapt and innovate in order to remain competitive. The rise of multi-manager funds suggests that this type of investment approach could play a key role in the future of the hedge fund industry.