Investing.com — Hedge funds have proven their worth in defending portfolios throughout occasions of great market volatility, as seen in August 2024.
UBS analysts in a observe flagged that hedge funds, particularly these utilizing non-directional methods, took benefit of market disruptions whereas additionally defending in opposition to losses in shares and bonds.
With ongoing market uncertainty, hedge funds have gotten extra vital for managing dangers, boosting returns, and dealing with unpredictable financial situations.
Opposite to expectations of a quiet summer time, August 2024 delivered important market turbulence. A mix of skinny liquidity, weak U.S. financial information, and geopolitical issues led to heightened volatility.
The volatility index surged, and international equities skilled sharp sell-offs, with the U.S. 60/40 portfolio declining by 3.1% in simply three days, in accordance with UBS analysts.
225 additionally noticed a dramatic 20% decline, underscoring the fragility of world markets.
“Nonetheless, early August introduced market jitters in opposition to a backdrop of skinny liquidity on account of weak US jobs and manufacturing information, sparking issues of a “hard landing.,” the analysts stated.
The unwinding of leveraged positions, particularly in Japanese markets, exacerbated the state of affairs and led to important sell-offs throughout asset courses.
Whereas conventional long-only portfolios suffered on account of heightened correlations between equities and bonds, hedge funds excelled by providing uncorrelated returns and seizing alternatives introduced by volatility.
UBS flags that hedge funds with decrease market publicity, together with these using fairness market-neutral and various credit score methods, considerably outperformed throughout August’s market swings.
Convertible arbitrage methods, which profit from lengthy volatility profiles, gained 1.1% in August by capitalizing on sharp reversals in market sentiment.
Equally, fastened earnings relative worth methods and credit score hedges contributed positively, with UBS noting that many managers have been in a position to monetize features from widened spreads earlier than markets rebounded.
Hedge funds not solely provide draw back safety but additionally thrive in environments characterised by market dislocations.
UBS analysts stress that in durations of volatility, costs typically deviate considerably from their intrinsic values, offering hedge fund managers with distinctive alpha alternatives.
By taking contrarian positions—shopping for undervalued belongings or shorting overvalued securities—hedge funds can revenue as costs revert to their pure averages as soon as markets stabilize.
UBS factors to the success of discretionary macro methods, which navigated August’s turbulence by capitalizing on strikes in international forex and bond markets.
One of many key benefits hedge funds provide is their means to supply uncorrelated returns during times of market instability.
As correlations between asset courses rise throughout occasions of stress, portfolios comprising conventional belongings like shares and bonds develop into extra weak to simultaneous declines.
Hedge funds, nevertheless, are designed to use inefficiencies out there and benefit from worth dislocations, moderately than merely using broader market actions.
As per UBS, methods resembling international macro, fairness market-neutral, and multi-strategy funds have been notably efficient in delivering uncorrelated returns, serving to to easy out portfolio efficiency and scale back general danger. These methods enable traders to keep up publicity to high-risk markets whereas mitigating the influence of sharp sell-offs.
UBS analysts foresee continued volatility within the coming months as central banks alter financial insurance policies, and geopolitical dangers stay elevated. Whereas inflation issues have eased, financial information continues to fluctuate, and the trail of future Federal Reserve charge cuts stays unsure.
In the meantime, the looming U.S. presidential election is predicted to deliver additional political uncertainty, which may drive market swings.
Given these components, UBS recommends that traders incorporate hedge fund methods into their portfolios to arrange for future volatility.
Low web fairness methods, various credit score, international macro, and multi-strategy funds are seen as well-positioned to assist traders handle dangers and seize alternatives as markets evolve.
Whereas hedge funds current important alternatives, UBS additionally emphasizes the dangers related to these investments. Hedge funds are sometimes illiquid and will require long-term lock-up durations.
Moreover, their methods may be advanced, and traders needs to be ready for potential losses, particularly when leverage is employed.
As such, UBS urges traders to strategy hedge fund investments throughout the context of a well-diversified portfolio and guarantee they’re snug with the related dangers.
