- 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.
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.
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.
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.
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.
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.
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 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.