Alternative investments state of the union and outlook

Introduction

This publication provides our views on the state of the hedge fund marketplace. Going forward, we’ll present our take on significant market developments and our perspective on potential opportunities for hedge fund investors on a periodic basis. As always, please contact your Truist advisor to learn more, and for guidance on how our views might inform your portfolio.

2022 performance and outlook for hedge fund investors

Hedge fund market leadership changed in the first half of 2022 as the equity and “return enhancement” oriented strategies that had dramatically outperformed for several years ceded their top status to more “diversifying” strategies that had comparatively underperformed. The previously strong performance of many directional, growth-oriented equity funds with a bias toward technology, health care and consumer discretionary sectors halted as the interest rate environment shifted and growth equities came under severe pressure. By contrast, discretionary global macro and managed futures (CTAs) provided strong absolute performance in the first half of 2022 and various multi-strategy, relative-value and low net exposure equity long/short funds also benefitted from either good capital preservation or, in a few cases, small gains.

Notably, hedge funds helped preserve capital in the worst market environment for equities and bonds since the 1970s: the HFRI Fund Weighted Composite Index was down only 4.0% through August versus the MSCI ACWI registering a 17.8% decline for the same period.

This degree of downside risk mitigation compares favorably with other recent market stress periods including:

• March of 2020 (Covid-19)
• Sell-off in 4Q 2018
• The 2015-2016 period
• The Global Financial Crisis in 2008-2009

In the final analysis, we believe the first eight months of 2022 represent a key shift in the character of risk in global financial markets and are consequential for the positioning of hedge fund investors. The acute change in the environment has made it imperative to move away from dependence on more equity beta-driven strategies and emphasize diversifying strategies such as global macro, managed futures and select multi-strategy funds.

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