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Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
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US hedge funds continued to UNDERPERFORM in June
Summary: US hedge funds continued to underperform in June. They were up +1.3% relative to US stocks which were up +6.4% in June. Two insights: (1) US activist hedge funds had a banner month up +6.1% in June. (2) Even US hedge fund giants underperformed broad markets in 2023.
Mutual funds generally employs investment strategies that are 'long only' meaning they buy and hold with the expectation that the investments rises in value over time.
Where hedge funds and mutual funds differ are:
1) The investment strategies used by hedge funds are usually more complex and flexible.
2) The initial investment needed to access a hedge fund could be in the millions of US dollars so it is normally reserved for wealthy clients.
Originally hedge funds were formed with the simple objective of 'hedging' (protecting) investment risk that stemmed from long only (buy and hold) investments.
2 insights for June:
1️. US activist hedge funds had a banner month up +6.1% in June
"Activist" hedge funds are ones which identifies poorly run companies that offer upside potential if they able to 'turnaround' the company.
The hedge fund after identifying the company then accumulates a large number of shares in the public company (making them a 'majority' or sizeable shareholders) to gain operational/financial influence via their new voting rights. Think of them as 'corporate raiders' or if you still remember Gordon Gekko from Oliver' Stone's 1987 film Wall Street movie, Gekko was based from Wall Street activist legend Carl Icahn. With this influence they persuade the company's boards and/or management teams to make their desired changes that they feel will increase the company’s profitability and in turn the company's share price.
As a result such activist hedge funds' profit are based on the increase in stock price after these changes take place. In 2023 one of the largest activist hedge funds (Pershing Square) with over US$16 billion assets was up +7.3% in June and 10.0% in 2023.
2️. Even US hedge fund giants underperformed broad markets in 2023
Here is a snapshot of the year-to-date performance of US hedge fund giants (AUM = assets under management):
Citadel (US$62 billion AUM): +7.2%
Millennium (US$59 billion AUM): +2.8%
Point72 (US$27 billion AUM): +6.1%
This is a far cry against US stocks which as of end of June was up +15.9%. With hedge fund managers losing confidence in the economic prospects for the remainder of 2023 according to AIMA's Hedge Fund Confidence Index, it could suggest they have more challenges ahead. What are their concerns?
- Macro: Stubbornly high inflation levels and prospects or more rate hikes ahead
- Geopolitical: Tensions in Europe and between US/China remain high
- Regulatory: Uncertainty for US based hedge funds
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