Summary: US hedge funds continued to underperform in June. They were up +1.3% relative to US stocks which were up +6.4% in June. Two insights: (1) US activist hedge funds had a banner month up +6.1% in June. (2) Even US hedge fund giants underperformed broad markets in 2023.
Mutual funds generally employs investment strategies that are 'long only' meaning they buy and hold with the expectation that the investments rises in value over time.
Where hedge funds and mutual funds differ are:
1) The investment strategies used by hedge funds are usually more complex and flexible.
2) The initial investment needed to access a hedge fund could be in the millions of US dollars so it is normally reserved for wealthy clients.
Originally hedge funds were formed with the simple objective of 'hedging' (protecting) investment risk that stemmed from long only (buy and hold) investments.
2 insights for June:
1️. US activist hedge funds had a banner month up +6.1% in June
"Activist" hedge funds are ones which identifies poorly run companies that offer upside potential if they able to 'turnaround' the company.
The hedge fund after identifying the company then accumulates a large number of shares in the public company (making them a 'majority' or sizeable shareholders) to gain operational/financial influence via their new voting rights. Think of them as 'corporate raiders' or if you still remember Gordon Gekko from Oliver' Stone's 1987 film Wall Street movie, Gekko was based from Wall Street activist legend Carl Icahn. With this influence they persuade the company's boards and/or management teams to make their desired changes that they feel will increase the company’s profitability and in turn the company's share price.
As a result such activist hedge funds' profit are based on the increase in stock price after these changes take place. In 2023 one of the largest activist hedge funds (Pershing Square) with over US$16 billion assets was up +7.3% in June and 10.0% in 2023.
2️. Even US hedge fund giants underperformed broad markets in 2023
Here is a snapshot of the year-to-date performance of US hedge fund giants (AUM = assets under management):
Citadel (US$62 billion AUM): +7.2%
Millennium (US$59 billion AUM): +2.8%
Point72 (US$27 billion AUM): +6.1%
This is a far cry against US stocks which as of end of June was up +15.9%. With hedge fund managers losing confidence in the economic prospects for the remainder of 2023 according to AIMA's Hedge Fund Confidence Index, it could suggest they have more challenges ahead. What are their concerns?
- Macro: Stubbornly high inflation levels and prospects or more rate hikes ahead
- Geopolitical: Tensions in Europe and between US/China remain high
- Regulatory: Uncertainty for US based hedge funds
Share this research with just a click of the sharing icon next to the article title, you can also post it directly to LinkedIn, Twitter, Facebook or even send it via email.
Join our community of traders and investors by sharing valuable insights.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.