Stocks and bonds should do better this year than hedge funds.
When stock prices go down, bond prices go up. At least, that’s what should happen.
Most asset classes seem to be falling at the same time right now.
Over the past month, the S&P 500 has dropped by about 8%, while U.S. Treasury yields have continued to go up (with prices heading lower).
According to a new report from UBS, hedge funds have done better than most and are “well positioned to deal with the current market volatility.”
According to research from a Swiss investment bank, hedge funds made 0.4% in August, while global stocks lost more than 4%.
Hedge funds are alternative investments that use many different strategies, such as betting on markets that are going down. Many also use leverage to make the most money possible.
Such investments used to be limited to a small group of investors, but now ETFs make it easy for anyone to get in on them.
The UBS report also showed that the hedge fund performance tracker, the HFRI Fund Weighted Index, had only dropped by 4% this year up until August, while the MSCI World Index had dropped by 15.6% over the same time period.
This year, hedge funds have consistently done better than broad equity indexes, as shown in the chart below. For example, even though the MSCI World Index fell by more than 8% in April and June, hedge funds made 2.3% and -0.7% in those months.
In a note to clients, the bank said that political risks, macro issues, and monetary policy had weighed on markets and caused most hedge fund strategies to do better.
“Some hedge fund strategies can do well in markets that are volatile and move sideways,” the report said. “We expect this kind of market to last into next year.”
As central banks have become more worried about inflation, the chances of a recession have gone up this year. UBS said that in this kind of situation, it likes hedge funds that have “macro strategies” that can trade in markets that are unstable.
The report said, “These funds can invest in a much wider range of underlying securities, such as commodities, foreign exchange, bonds, and stocks.” “Multi-strategy funds are also appealing because they give investors access to a variety of alpha sources and can quickly move their money to the best opportunities as they change.”
Can bonds be brought back?
Right now, bond prices are falling along with stock prices, but UBS thinks that will soon change back to normal.
The report said that since 1930, bond prices had gone up after both stocks and bonds had lost money for a year. Bonds have always given back an average of 11%.
