Hedge Funds Well Positioned to Stabilize Portfolios Ahead of US Election: UBS By Investing.com

Financial markets saw high volatility and sharp reversals in August, largely driven by weak economic data from the United States and growing concerns about the economy’s trajectory, analysts at UBS said.

Against this backdrop, risk assets showed resilience, with global equities up 2.5% and global bonds up 1.1%. Although hedge funds lagged stocks and bonds with a modest 0.3% gain, they played a key role in providing stability during the market turmoil.

UBS points out that hedge funds are uniquely equipped to stabilize portfolios, especially as the US presidential election approaches.

Performance among hedge fund strategies varied, with equity hedge managers leading the charge with monthly gains of 0.7%.

They were closely followed by relative value strategies, which posted gains of 0.6%, and event-based strategies, which rose 0.4%.

In contrast, macro managers faced challenges, posting an overall decline of 1.5%. In particular, commodity trading advisors suffered the most significant losses, down 2.6%, while discretionary macro managers saw a more modest decline of 0.9%.

UBS analysts signaled that managers with lower market directionality outperformed their counterparts with higher beta exposure, reaffirming the benefits of diverse hedge fund strategies in tumultuous market conditions.

Analysts at UBS anticipate that several key factors will determine market dynamics in the coming months, including potential interest rate cuts by central banks, the evolution of economic indicators, geopolitical developments and the upcoming US presidential election, which could introduce further volatility .

August’s market swings served as a reminder of how quickly conditions can change, highlighting the importance of a diversified portfolio to mitigate the risks associated with traditional investment strategies.

Historically, hedge funds have proven their ability to thrive during periods of high volatility, particularly around significant events such as the US election. UBS analysts say this environment presents solid opportunities for hedge funds to exploit market dislocations, ultimately increasing portfolio diversification.

They suggest that investors consider focusing on low-equity long/short strategies that can capitalize on market dispersion and reduce exposure to potential sell-offs, thereby complementing traditional equity investments.

In addition, UBS advocates diversification within alternative credit strategies, recommending tactical managers able to navigate sector or regional dispersions. These managers can skillfully take net short positions if economic conditions deteriorate unexpectedly.

The current macroeconomic landscape also invites consideration of strategies that stimulate macroeconomic change. Historically, macro funds have effectively navigated diverging global cycles and differing central bank policies, providing strong diversification benefits during turbulent times.

UBS points out that multi-strategy platforms, with their adaptable approaches to changing investment strategies based on evolving market conditions, offer a comprehensive solution for managing risk and seeking return in different scenarios.

While the potential for hedge funds to provide portfolio stability is significant, UBS analysts caution investors to remain aware of the unique risks associated with investing in hedge funds, including partial illiquidity, leverage, complexity and high dispersion of returns across managers.

August’s market recap illustrates the challenges hedge funds have faced amid heightened volatility and shifting sentiment, particularly after the Bank of Japan’s July rate hike and concerns about the U.S. economic recovery.

As global equity markets posted sharp swings and geopolitical risks loomed large, hedge funds, tracked by the HFRI Fund Weighted Composite Index, managed a 0.3% month-on-month gain, up 6.8 %. This performance underscores the potential for hedge funds to provide stability in uncertain market environments.

Luna has also seen notable success in specific hedge fund strategies. For example, relative value convertible arbitrage managers posted a 1% gain in August, capitalizing on market dislocations and volatility, while equity market neutral funds gained 0.7%.

As markets look to the US election and the broader economic landscape, UBS remains bullish on the role hedge funds can play in stabilizing portfolios and generating strong returns.

In the face of evolving economic conditions and potential volatility, hedge funds are well positioned to provide the diversification and adaptability investors need to navigate an increasingly complex investment environment.