Hedge funds began adopting riskier trading strategies in the first quarter of 2013 as the global economic outlook improved and US stocks soared, bringing the main hedge fund index to an all-time high, according to industry analysis and consulting firm HFR.
The benchmark HFRI Fund Weighted Composite Index increased 3.9 percent in the first quarter of 2013 to 11,482, beating the previous record set in April 2011, HFR says in a press release. Gains in the quarter, which ended a 20-month drawdown for the index, were driven by equity and arbitrage trading strategies.
But rising shareholder activism, quantitative easing (QE) programs by major central banks around the world and sovereign risks such as the European debt crisis remained key risks throughout the quarter, and will likely temper enthusiasm for risk in coming months, HFR adds.
‘This year has started in a very similar manner to 2012, with a risk-on trading environment contributing to strong performance from equities and more balanced gains from hedge funds as macro risks remained pronounced,’ says Kenneth Heinz, president of HFR, in the press release.
‘Extensive stimulus and QE have provided a base of support for US and Japanese equities in recent months, but the risks of competitive currency devaluations, extraction of QE stimulus and evidence of labor market weakness have grown as well, prompting many managers to adopt conservative positioning by reducing net exposure to the equity market rally.’
Hedge funds focused on equities posted gains of an average 5.3 percent in the first quarter, topped by gains of 6.3 percent on funds focused on healthcare and technology, according to HFR. Funds focused on equities in the energy and basic materials sector, meanwhile, posted a quarterly decline of 0.2 percent in the atmosphere of increased risk tolerance.
Those funds focused on emerging markets saw a 2.4 percent increase in the quarter, with all of the gains coming in January and February before a 1 percent drop in March, according to HFR’s data. Emerging markets in Asia led the increase, with a gain of 4.9 percent, while the index for Russia and eastern Europe posted a decline of 0.7 percent in the quarter.
The biggest gains in the quarter were realized by funds focused on a ‘yields alternative strategy’, which seeks to gain from yield differentials between similar investment instruments, mainly in the energy infrastructure and real estate sectors. Funds following a yields alternative strategy gained an average of 9.4 percent in the quarter.
