In recent days, the hedge fund industry has experienced significant volatility, with some funds suffering their worst day in nearly two years. According to reports from MarketWatch and Business Insider, long/short hedge funds were particularly affected by the market downturn. These funds combine investments that bet on companies that will appreciate in value with those that will decline. The equity component of multi-strategy funds also experienced losses, although to a lesser extent.
The causes of this market turbulence are multifaceted. Goldman Sachs reports that long/short funds were hurt by their exposure to momentum, high volatility, and concentrated stocks. Meanwhile, fundamental strategy long/short funds were affected by the same factors as well as their exposure to these areas.
Multi-strategy funds also suffered from exposure to momentum and crowded trades. The Nasdaq 100 index experienced a significant decline of 2.9% on Wednesday, July 18, with the Dow Jones Industrial Average and S&P 500 also experiencing losses.
The reasons for this market volatility are not entirely clear. Some experts suggest that it may be due to the ongoing pandemic, the rise of other investment vehicles, or a psychological shift in managers. However, it is important to note that hedge funds have historically thrived in struggling markets and have been known to outperform during times of economic uncertainty.
Despite these challenges, some hedge funds remain bullish on certain sectors. For example, gold hit an all-time high of $2,483.73 an ounce on July 15 as traders ramped up bets on earlier and deeper monetary easing from the US Federal Reserve and sought haven in the precious metal amid growing geopolitical risks.
It is important to remember that hedge funds, like all investment vehicles, come with risks. As such, it is crucial for investors to carefully consider their investment strategies and stay informed about market conditions.
