Hedge funds eye strongest monthly returns in over a decade

Hedge funds are on track to deliver their strongest monthly performance in more than a decade, recovering from a sharp downturn in March, as per a Goldman Sachs note, cited in a Reuters report.

The recovery follows a difficult period triggered by the Iran war, which had weighed on returns during March.

However, improved market conditions have helped funds regain momentum, the Goldman Sachs quarterly hedge fund industry report showed.

Long-short strategies drive monthly gains

Stockpickers employing long and short strategies have emerged as the top performers this month.

Goldman Sachs said these funds are up 7.7% so far this month through Tuesday’s close.

This marks their strongest monthly performance since the start of 2016, when the bank began tracking the data.

Long positions benefit when asset prices rise, while short positions generate profits when prices decline.

The combination has allowed managers to navigate volatile conditions and capture gains from both sides of the market.

On a year-to-date basis, long-short equity funds have gained approximately 6.7%, with Asia- and China-focused managers leading overall performance.

First-quarter performance remains modest

Despite the recent rebound, overall hedge fund performance in the first quarter remained relatively modest.

Funds across all strategies posted average gains of 1.6% during the quarter.

This comes after a difficult March, when funds were down 1.8% as macro traders faced widespread losses during market turbulence.

The data highlights the extent of the recovery in April, as funds reversed earlier declines and returned to positive territory.

Strong inflows support equity-focused funds

Equity long-short hedge funds attracted significant investor interest during the March quarter.

These funds recorded their largest inflows since 2022, supported by continued bullish sentiment among allocators and limited partners.

Investors continued to back money managers despite recent market struggles, signalling confidence in their ability to generate returns in volatile environments.

Lower losses compared to traditional portfolios

During March, hedge funds showed relative resilience compared with traditional investment portfolios.

Hedge funds incurred 35% of the losses seen in portfolios allocated 60% to stocks and 40% to bonds, as mentioned in a Reuters report.

This comparatively lower drawdown underscores the defensive characteristics of hedge fund strategies during periods of market stress.

Rising dispersion highlights market volatility

The report also pointed to a sharp increase in dispersion among hedge fund returns.

The gap between top-performing and underperforming funds rose to its highest level in three years during March.

This reflects heightened volatility and differing outcomes based on strategy and positioning.

Sector and strategy outperformance

Certain strategies and sectors delivered standout performance during the quarter.

Equity long-short funds generated so-called "alpha" returns, or profits derived from trading skill rather than broader market movements.

Market-neutral funds gained 10.3%, while healthcare-focused funds surged 33.6%.

Asia-focused strategies also performed strongly, posting gains of 28.1%.

The divergence in returns highlights how targeted strategies and regional exposure played a key role in driving hedge fund performance during a volatile period.