Hedge Fund Insights by PivotalPath – Capturing the Rally?

Summary

• The PivotalPath Composite Index returned 0.2% in May as the US debt ceiling came to a head, along with optimism of a soft landing.
• Meanwhile, the S&P 500 Index rose 43bps, and the Nasdaq was up 5.8%.
• Year to date, the PivotalPath Composite is up 2.0%. The S&P is now up 9.7% while the Nasdaq has climbed 23.6% YTD.

Strategy Highlights

Hedge fund strategy performance was mixed with the Equity Sector rising 3.1% in May followed by Managed Futures, which recovered from the previous month’s losses to gain 1.4% in May. Event Driven and Equity Quant lagged, declining 1.7% and 1.0%, respectively.

Alpha Generation

For the 12-month rolling period ending in May, the strong Equity Sector performance drove significant alpha generation. This was followed by Multi-Strategy, which has consistently generated positive alpha.

The chart below depicts alpha generation for each PivotalPath Index, ranked from high to low. Each strategy is color-coded for easy tracking.

Performance

As illustrated in the graph below, with the exception of the $100M-$250M funds, all AUM bands were again positive for the month with larger funds outperforming. Year-to-date, all AUM bands are now positive as well.

Pivotal Context

The Hedge Fund Takeaway

The PivotalPath Composite Index rose modestly (+0.2%) in May, leaving the index at +2.0% year-to-date vs. the S&P 500 up 9.7% and the Nasdaq up 23.6%. It should be noted the Russell 2000 has fallen every month since January, illustrating the thinness of the market rally; the Russell is down 66bps through May.

While hedge funds overall were positive for the month, 55% of all funds reporting posted positive returns (average +2.5%) and 45% were negative (average -2.7%). YTD however, 67% of funds are positive (average +6.7%) and 33% are negative (average -5.2%). Equity Sector and Equity Diversified continue to lead all indices, up 7.2% and 3.2% YTD, respectively.

Within Equity Sector, TMT is up 11.8% YTD while Financials is down 6.6%.

The Macro Backdrop

Economic uncertainty shifted away from the US Debt ceiling crisis to the Fed’s interest rate decisions and recession fears. The market reaction was mixed with the S&P 500 rising 0.43%, the Nasdaq up 5.8%, the DJIA falling 3.5%, and the Russell 2000 declining 1.1%. As mentioned above, year-to-date the S&P is up 9.7% and the Nasdaq is up 23.6%, while the DJIA is down 72bps and the Russell 2000 is down 66bps.

The US 10-year Treasury yield increased from 3.42% to 3.64% in May. The US 2-Year yield also rose from 4.01% to 4.40%.

The modest increase in the yield curve inversion increases the likelihood of a 2nd half recession and the potential of Fed cutting rates. This shift has resulted in in the continued rally in the Biotech sector (XBI) +4.64%, Technology (XLK) +8.92%, and Communications (XLC) +3.91%. Energy (XLE) declined 10.03% along with Materials (XLB) -6.87%. Energy is now the worst performing sector YTD, down 12.4%.

Volatility increased in May, with the VIX +13.7%, its largest month of the year.

Dispersion

After retreating to a 46-month low in April, PivotalPath’s proprietary Dispersion Indicator fell slightly again in May. On average YTD, it is now BELOW its historical average dating back to January of 2008, after a multi-year period in which it remained at extreme highs.

Larger funds continue to outperform smaller ones in May; funds greater than $1B have outperformed for the year as well.

Factors

The Dow Jones U.S. Thematic Market Neutral factors continue to be mixed:

Value and Momentum reversed course in May, declining 4.3% and 3.8%, respectively, and are down 10.9% and 6.1%, respectively, YTD.

Low Beta also reversed, declining 7.1% in May after a strong April and is now down 10.4% YTD.

The size factor continued to recover rising modestly by 39bpsin May and is now down 1.1% for the year.

Leverage

Leverage of US Equity Long/Short Fundamental funds continues to be at the lower end of its historical range, though off historic lows.

The Equity Diversified U.S. Long/Short Fundamental Index maintains a beta of 0.4 to the S&P 500 in the last 12 months through May. Exposure has remained steady since the lows reached in May 2022 of 0.35, indicating that long/short funds are somewhat less bearish on equities. However, it is still well below the levels seen in 2019-2021 when exposure averaged over 0.5.

Jon Caplis serves as PivotalPath’s CEO, responsible for setting the firm’s strategy and overseeing all aspects of the firm’s operations. Mr. Caplis also serves on PivotalPath’s board. In his 10 years of direct hedge fund experience, Mr. Caplis served as co-head of portfolio allocation and risk management at Campbell & Co., a multi-billion dollar systematic hedge fund.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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