Hedge funds are having a volatile 2018

Funds have lagged behind the S&P 500 for the first half of 2018 despite market swings

Hedge funds have long touted their ability to do better when things turn volatile. But they lagged behind the S&P 500 for the first half of 2018 despite market swings tied to trade policy tensions and interest rate increases.

A widely followed hedge-fund index maintained by data research company HFR dropped .46 per cent in June, pulling down the industry’s gains for the first half of 2018. The index rose .81 per cent in the first two quarters, which is lower than the 2.65 per cent return on the S&P 500, including dividends, over the same period.

The only large category of hedge funds that posted an increase in June were funds that seek to capitalize on mergers and acquisitions, according to the HFR figures. Those that specialized in stock picking and macroeconomic analysis posted declines.

Hedge funds typically bet on or against stocks, bonds or other securities, often using borrowed money and charging hefty fees — 2 per cent of assets under management and 20 per cent of profits.

Many hedge funds dropped less than the overall market during the latest financial crisis and some even posted outsize gains by anticipating the collapse.

But since 2008, the funds have struggled to do better than lowcost, passive investment products that track indexes like the S&P 500.

Last year, hedge funds turned in their best performance in a rising market since 2013, with returns of 8.5 per cent, according to HFR. The industry also attracted new capital.

This year, hedge funds have struggled at times amid market uncertainty surrounding the Trump administration’s recent round of tariffs and two interest rate increases. The industry was off to a good start at the beginning of the year, as the HFR index increased 2.31 per cent in January, only to decline in both February and March.

The swings continued into the second quarter as the industry slowly climbed back its gain in April and May with a slight fall in June. The index rose .86 per cent in the second quarter.

Those who struggled the most during the first half of 2018 were funds that tried to get ahead of political and other broad trends, or so-called macroeco- nomic funds. They dropped 1.81 per cent through the first six months, including a .30 per cent drop in June. HFR President Kenneth Heinz said in a news release Monday that trade-centred macroeconomic events are likely to accelerate during the second half of 2018, “contributing to a fluid environment and increased opportunity” for certain funds. “Funds which have demonstrated ability to navigate this environment are likely to drive performance and growth” during the second half of the year, he said in the release.