Hedge funds struggle for September gains as rate, AI swings bite

Hedge Funds Face September Losses Due to Rate Hikes and AI Market Swings

By Anirban Sen and Summer Zhen

September Market Volatility Impacts Hedge Fund Performance

HONG KONG, Oct 2 (Reuters) - Global hedge funds struggled to deliver positive returns in September as surging bond yields, higher oil prices and sharp swings in AI shares whipsawed the markets, according to prime brokerage notes and investors.

Performance of Equity Long-Short Funds

Global fundamental equity long-short funds on average lost 0.55% last month, Goldman Sachs Prime Services team said in a note, although they still outperformed the MSCI World Index which fell 1.3%.

Systematic Funds Outperform

In contrast, computer-driven systematic equity long-short funds rose 3.46% last month, marking their best monthly performance this year, according to Goldman Sachs.

Key Market Drivers in September

September was dominated by central bank headlines. The US Federal Reserve raised interest rates for the first time since 2023, signaling more rate hikes in coming months. The Iran war pushed oil prices higher and sent US Treasury yields to two-decade highs.

AI Sector Volatility

Fears of AI spending slowdown also triggered sharp swings in crowded technology positions from the US to South Korea, complicating short-term trading.

Regional Hedge Fund Activity

United States Sector Divergence

In the US, hedge funds sold most sectors in September, but divergence emerged within the tech sector where electronic equipment and hardware were sold off, while semiconductor equipment and software attracted strong inflows, Goldman Sachs said.

Asia Hedge Fund Performance

In Asia, Morgan Stanley said hedge fund performance was subdued in September due to economic uncertainty. The bank estimated Asian hedge funds across strategies fell 0.6% last month through September 25, compared with a 0.2% decline globally.

Profitable Strategies Amid Volatility

Some strategies profited from the sharp moves in commodities and rates.

Trend-Following Funds Lead Gains

Trend-following hedge funds were among the biggest winners in September with the Société Générale trend index gaining more than 4%.

Drivers of Trend-Following Success

Short fixed income and long energy positions largely drove the gain, according to Winton Group.

Industry Outlook in a Rate-Hiking Environment

The rate-hiking environment could create greater divergence across the hedge fund industry.

"Some benefit directly from higher short-term rates, while others face higher financing costs that can materially reduce returns," said Don Steinbrugge, CEO at Agecroft Partners.

September Hedge Fund Performance Table

Fund Name September YTD

Dymon Asia 0.7% 7%

Pinpoint -1.5% 5.8%

Multi-strategy

Source: Reuters reporting

(Reporting by Summer Zhen; Editing by Emelia Sithole-Matarise)