Capital markets remained volatile during fourth quarter 2022. Risk assets appreciated significantly during October and November before giving back some of the gains in December. Three consecutive quarters of positive returns and outperforming most other strategies came to an end for macro hedge funds during the quarter.
We expect macro hedge funds to perform well, given our expectations that market volatilities will remain elevated and our view that inflation risks are skewed to exceeding expectations. We expect long/short managers will benefit from positive short rebates.
Volatility peaked in June as markets struggled to find equilibrium between inflationary pressures and the prospects of a recession. There was no shortage of uncertainty. Given the environment, hedge funds performed relatively well versus broad equity and credit market indexes, despite most strategies experiencing absolute losses.
Global capital markets remained volatile during fourth quarter 2021 but ended in strong positive territory for the quarter and year. While hedge funds generally produced positive absolute performance, many growth-oriented long/short equity managers experienced significant drawdowns during the quarter.
Global capital markets were volatile during third quarter 2021. In September, equity markets gave back most of the gains made earlier in the quarter. Markets are reacting to concerning economic and inflation data, geopolitical risks, and potential central bank tightening. Core hedge fund strategies were mixed but relatively flat during the third quarter.
In this quarter’s edition, we will explore the challenges and opportunities facing investors in US-listed Chinese equity as China regulators continue to crackdown on large Chinese technology companies.
The previous 12 months have been very positive for fundamental investors, as these managers have been able to identify the winners and losers as a result of lockdowns. We continue to believe hedge fund managers will be able to take advantage of the volatility presented by a choppy recovery, policy change by a newly elected US government, and permanent disruption within sectors as a result of COVID-19.
No, we do not believe that is generally the case. While the recent wild ride of a few companies’ share prices was novel in that it was coordinated by retail investors on the social media platform Reddit, the short coverings that contributed to the price spikes were all too familiar to long-time investors.
While fourth quarter 2020 brought an end to one of the most tumultuous years in recent history, capital markets performed well and hedge funds generated strong returns.
As 2020 comes to a close, we expect some key investment drivers to persist into next year. While our views speak to many different challenges confronting investors, including the poor bond yields on offer, the fate of US-China relations, and where to find growth, they are rooted in the belief that 2021 will be a year of healing for the global economy.