- Advertisement -
- Advertisement -

Which Hedge Fund Strategies Perform Best in Late-Cycle Phase?

- Advertisement -

Stockholm (HedgeNordic) – Market observers may have different views on where we are in the business cycle, but those finding themselves in a typical slowdown phase of the cycle may be interested in finding out which hedge fund strategies perform best during this phase. In a recently published report, asset manager Fidante Partners lays out an analysis of the behavior of a range of hedge fund strategies during the late stages of a business cycle covering a period of 20 years.

Although every business cycle is different in its own way, the four widely recognized phases of a business cycle are: recovery, expansion, slowdown, and recession. According to Fidante Partners, we are currently in the late stage of a business cycle characterized by flattening or even inverting yield curves and deteriorating growth prospects. Whereas various hedge fund strategies tend to generate similar returns over a long enough period of time, there is huge performance dispersion among strategies in the more challenging environment of a late stage business cycle. Because of more frequent corrections in equity markets and increased market volatility, macro-focused and short-biased hedge funds tend to perform better than their long-term averages in the late stage of business cycles.

Risk and return of hedge fund strategies in an economic slowdown. Source: Bloomberg, Fidante Partners. Data in US Dollars as at 31 July 2018.

Event-driven and long/short equity strategies, meanwhile, are found to struggle during the late stages of a business cycle as financial markets get choppy. Merger arbitrage, statistical arbitrage, and equity market-neutral hedge funds tend to perform in line with their long-term averages during this stage of a business cycle. That said, equity market-neutral and arbitrage strategies behave as expected in the late-cycle phase. Equity market-neutral hedge funds, for instance, aim to produce returns which are independent of broader equity markets and thus largely independent of changes in growth prospects or interest rates. Returns produced by arbitrage strategies are also expected to be largely independent of the prevailing interest-rate environment and growth prospects.

Merger arbitrage, statistical arbitrage, quantitative and volatility hedge fund strategies are found to deliver superior risk-adjusted returns across the entire cycle, with this subset of strategies also performing strongly during the late stage of a business cycle.

Risk-adjusted returns of hedge fund strategies in an economic slowdown. Source: Bloomberg, Fidante Partners. Data in US Dollars as at 31 July 2018.

The paper titled “Hedge funds in the late stages of a business cycle” can be found below:

Picture © leungchopan—shutterstock.com

Subscribe to HedgeBrev, HedgeNordic’s weekly newsletter, and never miss the latest news!

Our newsletter is sent once a week, every Friday.

Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

Latest Articles

RFP: Search for “Limited Loss” Strategies

Stockholm (HedgeNordic) – A German corporate investor is seeking to invest in at least one “limited loss” strategy, with a minimum allocation of €100...

Indecap and PriorNilsson to Unite Forces

Stockholm (HedgeNordic) – Swedish fund manager Indecap has announced the acquisition of fund boutique PriorNilsson Fonder, marking the beginning of a strategic collaboration set...

Benchmark-Plus High-Yield Investing at LD Pensions

Stockholm (HedgeNordic) – Danish pension fund LD Pensions manages two separate pension funds, each with different investment horizons. While the allocation across equities, investment-grade...

Small-cap Equities: Entering a Sweet Spot?

By Krzysztof Janiga, CFA, Senior Equity ETF Strategist at SPDR: As valuation levels in large caps became extreme, the market rally began to broaden...

Rhenman’s Healthcare Fund Transitions to Article 8 Classification

Stockholm (HedgeNordic) – Since its inception in mid-2009, the Rhenman healthcare fund has focused on investing in healthcare companies, which contribute to at least...

The ART of Finding Right Tails

Stockholm (HedgeNordic) – Philosopher Nassim Nicholas Taleb coined the term ‘Black Swan’ to describe the tendency to underestimate the likelihood of extreme, hard-to-predict events,...

Allocator Interviews

Latest Articles

In-Depth: High Yield


Request for Proposal

- Advertisement -