Hedge Fund Insights by PivotalPath – Focus Turns to the Fed

Summary

• The PivotalPath Composite Index returned 1.6% in June as the US debt ceiling was resolved early in the month and there was optimism around a soft landing and the end of the Fed hiking cycle.
• Meanwhile, the S&P 500 Index (S&P) and Nasdaq Index (Nasdaq) both rose 6.6%.
• Year-to-date, the PivotalPath Composite Index is up 3.5%, the S&P is +16.9% and the Nasdaq has climbed 31.75%.

Strategy Highlights

All major hedge fund strategy Indices gained ground in June. They are now each positive in 2023 except for Global Macro, which performed well in June but remains -0.1% for the year. The Equity Sector Index continues to lead the pack up 7.4% YTD. In June, the Equity Quant Index gained the most, appreciating 3%.

Alpha Generation

For the 12-month rolling period ending in June, the Managed Futures Sector continued to rise in the rankings and is now back at the top of the group.

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, all AUM bands were again positive for the month with larger funds outperforming. Year-to-date, all AUM bands are positive with the $1B-$2.5B band marginally leading the way.

Pivotal Context

The Hedge Fund Takeaway

The PivotalPath Composite Index rose 1.6% in June, bringing the index to +3.5% year-to-date vs. the S&P up 16.9% and the Nasdaq up 31.7%. The Russell 2000 Index also rose in June, breaking its 5-month slide. The index is now +7.24% year to date.

Even with a 19.6% rally in the S&P over the last 12 months, the Composite Index still generated alpha of 3.4% relative to it. Its beta of 0.1 is the lowest compared to the S&P since April of 2004.

Through June, 67% of funds are positive (average +8.1%) and 33% are negative (average -5.6%). Equity Sector and Equity Diversified continue to lead all Indices higher up 7.4% and 5.5% YTD, respectively.

Within the Equity Sector Index, the Financials Index recovered, rising 2.4% though remains down 5.4% YTD.

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 optimistic as the S&P rose 6.61%, the Nasdaq up 6.58%, the DJIA up 4.56%, and the Russell 2000 up 7.95%. All these indices are now positive on a year-to-date basis.

The US 10-year Treasury yield increased from 3.64% to 3.81% in June. The US 2-Year yield also rose from 4.40% to 4.87%.

The continued increase in the yield curve inversion increases the likelihood of a 2nd half recession and the potential of Fed cutting rates. Consumer Discretionary (XLY) rose 12% in June and is up 31.47% YTD. This is followed by Industrials (XLI) and Materials (XLB) rising 10.91% and 10.48%, respectively. Technology (XLK) continued its recovery from 2022, rising 5.83% in June and 39.71% YTD.

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 Dispersion Indicator was back slightly above its historical average in June with data going back to January of 2008. This comes after a multi-year period in which it remained at extreme historic highs.

Factors

Results continue to be mostly negative after a very strong 2022:

• Value had a second positive month rising 1.6% bringing it to -9.5% YTD.
• Low Beta continued to under-perform, declining 5.8% to -15.6% YTD.
• The Momentum factor fell 2.6% and -8.52% YTD.

Leverage

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

The Equity Diversified U.S. Long/Short Fundamental Index beta of dropped to 0.36 to the S&P 500 in the last 12 months through June. This represents the lowest exposure to the S&P 500 since May of 2022 and February of 2020 before that. Exposure is well below the levels seen in 2019-2021 when it averaged above 0.5 and is below the historical mean of 0.43 since January of 2008.

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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